The Office of Tax Simplification (OTS) has published 'Simplifying by Design', the first report of its current Capital Gains Tax (CGT) review. It recommends some major changes to CGT including increasing tax rates and removing business asset reliefs.

The report makes eleven recommendations, many of which do not appear to simplify CGT, although they may appeal to the Chancellor, Rishi Sunak, as methods for raising tax revenue.

They include ideas to:

First reactions from the leading tax and accountancy bodies to the OTS' review indicate little appetite for any major reform to CGT.

The Institute of Chartered Accountants in England and Wales’s (ICAEW) comments that there is no need to overhaul CGT, “the scope and boundary of CGT is generally clear” and that system “largely achieves” its policy intent of discouraging schemes that seek to convert income into a capital gain for tax purposes.

It highlights that the new system of 30-day reporting and payment of CGT on residential properties is “very problematic”. Concluding that: “There needs to be a strategic look at the reporting and payment of CGT and whether it should sit alongside income tax self-assessment or be completely separate. At the moment we have a confusing mix.”

The Chartered Institute of Taxation's (CIOT) Tax Policy Director, John Cullinane, said: “Today’s OTS report is a welcome step in exploring how capital gains tax distorts taxpayers’ behaviour, and its recommendations provide a useful framework for the Government to take the issues forward."

Noting that there are also interactions with the taxation of companies and trusts which need to be worked through, he says, "A diet of piecemeal Budget surprises would be unlikely to lead to a more coherent system or to achieve the best balance between these factors."

The OTS's recommendations

Rates & boundaries

Recommendation 1

 If the government considers the simplification priority is to reduce distortions to behaviour, it should either:

Recommendation 2

If the government considers more closely aligning Capital Gains Tax and Income Tax rates it should also:

Recommendation 3

If there remains a disparity between Capital Gains Tax rates and Income Tax rates and the government wishes to make Tax liabilities easier to understand and predict, it should consider reducing the number of Capital Gains Tax rates and the extent to which liabilities depend on the level of a taxpayer’s income.

Recommendation 4

If the government considers addressing Capital Gains Tax and Income Tax boundary issues, it should:

Annual Exempt Amount

Recommendation 5

If the government’s policy is that the Annual Exempt Amount is intended mainly to operate as an administrative de minimis, it should consider reducing its level.

Recommendation 6

If the government does reduce the Annual Exempt Amount, it should do so in conjunction with:

Capital Transfers

Recommendation 7

Where a Relief or Exemption from Inheritance Tax applies, the government should consider removing the capital gains uplift on death and instead provide that the recipient is treated as acquiring the assets at the historic base cost of the person who has died.

Recommendation 8

In addition, the government should consider removing the capital gains uplift on death more widely, and instead provide that the person inheriting the asset is treated as acquiring the assets at the historic base cost of the person who has died.

Recommendation 9

If the government does remove the capital gains uplift on death more widely, it should:

Business reliefs

Recommendation 10

The government should consider replacing Business Asset Disposal Relief with a relief more focused on retirement.

Recommendation 11

The government should abolish Investors’ Relief.

The report only focused on individuals’ liabilities and does not cover CGT for trusts or the attribution of offshore gains to UK resident individuals. Neither does it explore CGT in the years of an individual’s arrival or departure from the UK. 

As this review focuses on policy design and principles underpinning the tax, a second report will follow next year and will explore key technical and administrative issues.

Useful guides on this topic

Capital Gains Tax zone
Our guides to CGT including detailed guides to Business Asset Disposal Relief and other business asset reliefs, such as hold-over relief, guides to Private Residence Relief, and losses. Each guide is maintained and updated for new case law and legislation in real-time.

Inheritance Tax zone
Our guides cover all the key aspects of IHT

External links

OTS Capital Gains Tax review – first report: Simplifying by design

ICAEW: No need to overhaul CGT

CIOT: CIOT welcomes capital gains tax report but warns against piecemeal approach