CGT: a case for change but at what cost?

Inheritance tax and capital gains tax (CGT) have both been political hot potatoes for years and can be a tricky issue for clients and their advisers, particularly where property is involved.

Proposals to simply CGT and align its rates more closely with income rates have been tentatively welcomed. But if implemented, they could particularly adversely affect the wealthy because in its current form, people are incentivised to hang onto assets.

Simplifying CGT

The Office of Tax Simplification (OTS) recently published proposals including that government should consider a closer alignment between the rates of the two taxes. Currently, the highest rate of CGT is a low 28% compared to 45% for income tax. It also proposed reducing the annual exemption amount (currently £12,300 for individuals and PRs; £6,150 for trustees of settlements).

Further, it suggests government should consider whether certain gains should be brought within scope for income tax.

The OTS consulted on the issues after being asked by the chancellor, in July 2020, to “identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent”.

A number of areas were identified in which it said CGT is counter-intuitive, creates odd incentives and can distort business and family decision-making. The OTS’s report concluded that how the two taxes interact is incoherent and distortionary.

So what is the potential impact for IHT and gifts and transfers made during a client’s lifetime? Though CGT is, as the OTS points out, an incentive to transfer assets on death rather than inter vivos, that may not be the best move as far as those involved are concerned. This had already been identified by the OTS in July 2019 when it published a report on inheritance tax.

It recommended that in circumstances where an IHT relief or exemption applies, the government should consider removing the capital gains uplift on death, and allow for the recipient to be treated as acquiring the assets at the historic base cost of the deceased (resulting in a tax charge if an individual sells recently-inherited assets). CGT would be payable on the beneficiary’s disposal of the asset.

Clients and their advisers, or perhaps the beneficiaries themselves, would then have to consider the deceased person’s historic base cost for all the estate assets.

And what of other tax reliefs? The OTS also proposes that business asset disposal relief (BADR) (current maximum relief is £1m) should be completely abolished, and a form of retirement relief introduced once again.

Changes made on the back of the OTS proposals will, of course, have a negative impact particularly on, for instance, the wealthy, second homeowners and those inheriting significant amounts of assets. There have also been concerns expressed that entrepreneurial behaviour could be discouraged. What is certain is if the recommended changes to CGT are implemented, it would amount to a significant change to the tax system.

Payment deadlines

On a related note, practitioners have been reminded by HMRC of the new deadline for payment of CGT in relation to residential property sales, following changes that came into force last April.

Individual UK residents, executors and trustees (where relevant) are required to report cases where CGT falls due must be reported. Payment must be made online within 30 days of completion, otherwise there is a risk of a late filing penalty and interest.

Practitioners should be aware of these requirements when advising clients.


Posted on 05.01.21