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Capital Gains Tax – Is it possible to have a Capital Gains Tax System that is simple yet fair?

Posted on 17 Dec 2020 - What's trending?

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Some would say that the answer is a simple yes, why can’t one flat rate of Capital Gains Tax apply to all, but on the other hand would the same individuals suggest one flat rate of Income Tax for all, the answer is most likely no.

A report produced by the Office of Tax Simplification has outlined four broad policy choices:

  1. Rates and boundaries.  At present Income Tax and Capital Gains Tax rates are not in line, the OTS believe that this allows businesses, families and individuals to structure their assets in such a way as to allow income to be taxed at the lower Capital Gains Tax rate.  The OTS report outlines that if Income Tax and Capital Gains Tax rates were aligned, the complex rules surrounding the classification or Income/Gains would be reduced and an estimated additional £14bn would be raised each year.
  2. Annual Exempt Amount.  The OTS report states that the current annual exemption (£12,300) is too high.  The report suggests that the current exemption allows individuals to avoid the payment of Capital Gains Tax, whereas it should be set as a much lower level to simply operate as an administrative de Minimis.  The suggested exemption is £1,000 which is in line with the Property and Trading Allowance that was introduced in recent years.  
  3. Capital Transfers.  The report highlights the fact that is often advantageous from a tax point of view, to retain ownership of an asset until you die, particularly a business asset.  This is because under the current legislation, you do not pay Capital Gains Tax upon death and any assets which you own receive a tax free uplift to the market value at death.  The rule of thumb being that you don’t pay Capital Gains Tax but instead pay Inheritance Tax.  But IHT doesn’t always apply to business assets.  So where business assets are concerned, is it a case of having your cake and eating it, all be it that it’s the beneficiaries who are eating the cake at the wake.
  4. Business Relief.  The OTS this time are highlighting the availability of Business Relief in your lifetime.  The fourth policy discusses finding the right balance between stimulating business investment and offering tax reliefs to those individuals who have built up their business over time, whilst avoiding the use of Capital Gains Tax relief for Retirement Planning.  A number of suggestions are offered within the report, from increasing the qualifying shareholding from 5% to 25%, increasing the holding period to 10 years, and the introduction of an age limit.      

It is clear for everyone to see, that the tax system does need to be simplified, but it would be very difficult to implement changes to the Capital Gains Tax System without also making amendments to the Inheritance Tax System at the same time.  Reduction of the Annual Exemption to £1,000, without the provision of clearer exemptions for personal chattels, would in my mind create an insurmountable level of administration, to a tax system which is already crippled. 

We are only a little over half the way through the first tax year in which online Capital Gains Tax returns have been required in year.  A system which has more flaws than advantages, to think that a similar system may be required for all gains over £1,000 in future years, is mind blowing to say the least. 

With Capital Gains Tax, in my opinion the optimum outcome is to implement a new system, which is fair, generates enough revenue, but also encourages Investment in the UK economy.   How this can be done, I simply do not know.

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