Capital Gains Tax (CGT) review

The Chancellor of the Exchequer asked the Office of Tax Simplification (OTS) to carry out a review of the CGT regime.  The stated aim of the wide ranging review is for the OTS to provide recommendations for simplification of CGT, including "reducing distortions from both an administrative and technical standpoint".

The Chancellor has said that the government's intention is not to have "a horror show of tax rises with no end in sight".  However, if, as seems likely, the government is looking to increase the amount raised through CGT to help cover costs incurred as a result of COVID-19 measures, the main choices available seem to be either to increase CGT rates, possibly to align with income tax rates (as was previously the case) or to reduce or remove CGT reliefs, exemptions and allowances.

The OTS's call for evidence notes that CGT is a "modest source of revenue" and that most, but not all, CGT is paid by a relatively small number of taxpayers, and on relatively large gains.  It also highlights that most gains are taken out of CGT entirely by the annual tax-free allowance.  In the 2017-18 tax year, 62% of CGT came from people who made gains of £1 million or more, which is generally around 3% of CGT taxpayers each year and that those who pay CGT are twice as likely to pay higher rate income tax as taxpayers generally.  As such, an increase in CGT rates or a reduction of the annual allowance, will not affect the majority of voters, and so may seem by the government as an easier target than say income tax, from a political perspective.

Any change in CGT rates or to CGT reliefs, exemptions and allowances may have an effect on the benefit employees can derive from tax advantaged share plans.  It could also make growth shares, joint ownership arrangements and similar employee share incentive arrangements less beneficial.  Further erosion of entrepreneurs' relief, highlighted in HMRC's recent report as a positive factor for employees would also have an impact on EMI.

The OTS asked for high-level comments on the principles of CGT to be provided by 10 August 2020 and has asked for more detailed comments on the technical detail and practical operation of CGT by 12 October 2020.  Further details and a questionnaire can be found here.