The Office of Tax Simplification (OTS) has published its first of two papers with recommendations to the Chancellor, Rishi Sunak, for simplification of the capital gains tax (CGT) regime. The implications of some of the recommendations could have an enormous impact on the capital taxation of farms and estates.
Some fundamental changes to CGT have been put forward as part of the review including:
- Increasing CGT rates to align them more closely to rates of income tax.
- Replacing business asset disposal relief (formerly known as entrepreneurs’ relief) with a relief more focused on retirement.
- Abolishing investors’ relief altogether.
- Reducing the annual exemption – currently set at £12,300 per annum, the report suggests reducing this to a de minimis level in the region of £2,000 - £4,000.
- Removing the capital gains uplift on death such that beneficiaries are deemed to have acquired the assets at historic base cost. This was also recommended as part of the OTS review of IHT with reports published in 2018 and 2019, but to which the Government is still yet to respond.
It is important to note that the Chancellor is not under an obligation to implement any of the recommendations put forward by the OTS. As mentioned above with the IHT reports, it could also be some time before the Government provides a response to the review. It is widely speculated, however, that as the Chancellor will need to raise taxes following the extended support provided during the coronavirus pandemic, CGT could be an easy target to help raise some additional revenue for the Government. It is also one of the few taxes that the Government did not commit to freezing, during their parliamentary term, as part of their manifesto pledges.
Reducing the annual exemption could help to achieve the objective of raising additional revenue, however, it would not help to simplify the administrative burden. It would, in fact, mean that a large number of people may be required to file tax returns who have not been required to, previously.
If the Chancellor does decide to go as far as increasing the CGT rates to closer align them to those of income tax, we would expect some form of relief to also be introduced to ensure that inflationary gains are not taxed.
Currently, a significant amount of tax planning for farms and estates is around the taxation of gains on farmland and buildings where these are sold for development. These are generally long term projects and often span different generations. The removal of the CGT tax free uplift on death is likely to lead to an increase in CGT payable.
The report also considers further measures if rates are not aligned, including taxing more employee share scheme disposals as income and, for owner managed businesses, taxing any profits on liquidation relating to accumulated earnings under income tax rather than CGT.
The second report is not due to be published until 2021, so we would not expect any announcements on changes to CGT to be published by the Government before then and, realistically, probably not until the spring at the earliest.
If you would like to consider a review of your position now and how any potential changes could impact you, please do get in touch with your usual Hazlewoods contact or call 01242 680000 and ask to speak to one of our tax partners.