OTS Capital Gains Tax Review: Simplifying practical, technical and administrative issues
This second report considers key practical, technical and administrative Capital Gains Tax issues.
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This new report considers a range of key practical, technical and administrative Capital Gains Tax issues. It is the second report the Office of Tax Simplification (OTS) has produced from the review of Capital Gains Tax requested by the Chancellor in July 2020.
This second report covers a wide range of areas - from moving home to getting divorced, running or investing in a business or issues affecting land transactions. It also highlights a broader concern about the low level of public awareness of the tax, and the extent to which the administrative systems could do much more to support taxpayers.
Bill Dodwell, OTS Tax Director said:
Together these two reports make up the most comprehensive review ever conducted of the tax and the practical experience of those who report or pay it.
Many people have limited awareness or understanding of Capital Gains Tax. As the tax tends to affect taxpayers on a one-off basis (over 70% of those paying it in the eleven tax years to 2017-18 did so only once in that period), they do not so readily pick up the knowledge and experience that comes from dealing with something regularly.
This means it is particularly important that the rules, and HMRC’s guidance and processes, are intuitive and fit with the practicalities of life, so far as possible.
The report makes 14 recommendations, including in the following areas.
Integrating Capital Gains Tax into the Single Customer Account
There are three main ways of reporting a capital gain – through Self Assessment, the UK Property tax return for disposals of UK residential property, and the ‘real time’ Capital Gains Tax service.
The OTS recommends that HMRC integrate these into the new Single Customer Account, making it a central hub for Capital Gains Tax data, to ease the administrative burden for the 500,000 or so people who file returns of disposals in a typical year.
Bill Dodwell, OTS Tax Director said:
Integrating Capital Gains Tax into the Single Customer Account is a natural ambition for this vital HMRC programme and would reduce the need for people to fill in a full Self Assessment return just because they need to report a capital gain.
This work within HMRC will require sustained investment, building on the £68 million committed for the Single Customer Account and Single Customer Record in Budget 2021.
UK Property tax return
Around 150,000 individuals make a disposal of UK residential property each year, 85,000 of whom have a taxable gain and need to file a UK Property tax return within 30 days.
Even with adequate awareness and preparation the OTS considers that 30 days is a challenging deadline, even if this return were integrated into the Single Customer Account.
The OTS recommends that the government consider extending the reporting and payment deadline for the UK Property tax return to 60 days, or mandate estate agents or conveyancers to distribute HMRC provided information to clients about these requirements.
Private Residence Relief nominations
Private Residence Relief takes main homes outside the scope of Capital Gains Tax. Where taxpayers have more than one eligible home, they can choose which home they wish to benefit from the relief by making a nomination to HMRC.
At present there is insufficient awareness of the nomination procedure among the 1.4 million people who own second homes. It is also peculiar that nominations are needed even where no capital gain can arise on a rented second home.
The OTS recommends that the government review the practical operation of Private Residence Relief nominations, raise awareness of how the rules operate, and in time enable nominations to be captured through the Single Customer Account.
Divorce and Separation
Married couples or civil partners can transfer assets between them without triggering an immediate Capital Gains Tax charge.
Divorcing or separating couples continue to benefit from this rule in the tax year in which they separate. However, after that, transfers take place at market value in accordance with the normal Capital Gains Tax rules.
Bill Dowell, OTS Tax Director said:
In 2020 it took an average of a year to secure a divorce in England and Wales. Everyone who commented on this issue considered that limiting the tax rule about these transfers to the tax year of separation give couples inadequate time to reorder their affairs.
The OTS recommends that the government extend the operation of this rule to the later of:
- the end of the tax year at least two years after the separation event
- any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a court or equivalent processes in Scotland
Treatment of deferred proceeds when a business is sold
The proceeds from the sale of a business or land can be received in several different ways. Sometimes the proceeds of a sale might be paid over a number of years, or the proceeds could be a combination of cash and other assets such as shares. In addition, a business can be sold for an uncertain price that depends on future events.
Some of these more complex types of business and land sales create practical tax issues which can result in tax needing to be paid upfront before any cash has been received, distorting commercial decision making, and which are difficult for taxpayers to understand.
The OTS recommends that the government consider whether Capital Gains Tax should be paid at the time the cash is received in situations where proceeds are deferred, such as on the sale of a business or land, while preserving eligibility to existing reliefs.
Notes for editors
The OTS is the independent adviser to government on simplifying the UK tax system. The OTS makes recommendations for the government to consider. It does not implement changes – these are a matter for government and for parliament.
The OTS works to improve the experience of all who interact with the tax system. It aims to reduce the administrative burden - which is what people encounter in practice - as well as looking to simplify the rules. Simplification of the technical and administrative aspects of tax are important, both to taxpayers and to HMRC.
During this review, which was requested by the Chancellor, the OTS consulted with a wide range of individuals and businesses, receiving very strong engagement with its call for evidence from individuals, advisers and the general public.
The OTS has received almost 1,200 responses to its online survey, 180 submissions from individuals and experts and held 54 consultation meetings.
The first report, ‘Simplifying by design’, was published in November 2020 and considered the policy design and principles underpinning the tax.
This second report considers a range of key practical, technical and administrative issues, on the basis of the present policy design principles of Capital Gains Tax.
In the 2017-18 tax year, £8.3bn of Capital Gains Tax was paid, and £55.4bn of net gains (after deduction of losses) reported by 265,000 individual UK taxpayers. This compares with £180bn of Income Tax paid in that tax year by 31.2 million individual taxpayers.
However a significantly larger number of 500,000 taxpayers are required to report disposals each year, including those making losses or with no tax to pay because any net gain is covered by the Annual Exempt Amount of £12,300.
Press Enquiries only please contact Julie Gillespie, OTS Press Officer 03000 585028