The Office of Tax Simplification is reviewing Capital Gains Tax. We look at how this might affect Wrigleys' rural clients.
Rishi Sunak, the Chancellor of the Exchequer, has asked the Office of Tax Simplification (OTS) to review Capital Gains Tax (CGT). The review will both take a high-level assessment of the principles of CGT, and also scrutinise some of the details of the tax including whether and how it distorts taxpayers' behaviour.
It would be a cynic who suggests the government is using the review as a cloak and dagger operation to raise taxes. The OTS is an independent adviser to the government, and should the government wish to raise more tax it can do so legitimately in the budget. Regular reviews of the proper functioning of taxes are a good practice of government. OTS reports are well-informed, respected and offer sensible proposals. Some media reports of the review can be dismissed as fear-mongering.
As the OTS's scoping documents states, CGT does not exist in a vacuum and is best considered alongside, in particular, the other main capital tax, Inheritance Tax (IHT). It is to be welcomed that the review seeks to examine CGT's interaction with other taxes including IHT to eliminate distortionary behaviour.
We have previously commented on recommendations for tax reform, notably from the OTS itself and also the All Party Parliamentary Group (APPG) for Inheritance and Intergenerational Fairness. Both of these recent reports recommended abolishing the CGT tax-free uplift on death.
This particular rule can influence the behaviour of our farming and landowning clients, who are often encouraged to hold onto some assets until their death, whereupon they pass to the next generation with the benefit of Agricultural or Business Property Relief and a GCT tax-free uplift. This can hinder or complicate sensible business and family succession planning which would otherwise benefit from lifetime gifts to a dynamic younger generation keen to take the farm or family business forward with renewed energy.
The reports offered different ways to mitigate the tax due on death should the CGT tax-free uplift be removed. The APPG recommended a 10% capital transfer tax (a significant reduction on the current 40% rate of IHT), combined with the removal of agricultural and business reliefs. The OTS IHT review recommended that hold-over relief (a deferral of payment of CGT) should be available when assets pass on death without being sold.
It therefore comes as no surprise that the scoping document looks to examine this issue further. Interestingly, it suggests the OTS might recommend the widening of the range of assets on which a deferral of tax applies when a gift is made. As CGT is often a constraint on gifts, this is particularly interesting.
The UK tax system has historically sought to ensure farmers and small business owners are not forced to sell their businesses because of capital taxation. Wrigleys will work with other professional organisations such as the Society of Trust and Estate Practitioners and the Country Land and Business Association to ensure that any commendable attempt to simplify the CGT rules does not unduly penalise farmers and rural business owners who rely on extensive physical assets for the success of their business.
Originally published 23 July, 2020
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