Government report calls for capital gains tax overhaul
A government body has recommended cutting the annual allowance on capital gains tax and bringing rates closer in line with income tax as part of a far-reaching review commissioned by the Chancellor Rishi Sunak.
The Office of Tax Simplification, which acts as an independent advisor to government, said that following an extensive consultation, it had identified a range of areas where CGT was “counter-intuitive” and created “odd” incentives.
In particular, if found that the “relatively” high level of the annual exempt amount, currently £12,300, could distort investment decisions, and that the government should consider reducing its level. In 2017-18, around 50,000 people reported net gains just below the threshold.
In addition, the OTS said that the disparity in rates between CGT and income tax can distort both business and personal decision making, creating an incentive for taxpayers to effectively re-characterise income as capital gains.
GCT is charged on gains at 10% for a basic rate taxpayer and 20% for higher and additional rate taxpayers. Income tax is charged at a basic rate of 20%, raising to 40% and 45% for higher and additional rate taxpayers respectively.
Bill Dodwell, tax director at the OTS, said: "If the government considers the simplification priority is to reduce distortions in behaviour, it should consider either more closely aligning CGT rates with income tax rates, or addressing boundary issues as between CGT and income tax."
Other recommendations include the government considering removing the capital gains uplift upon death, replacing business asset disposal relief with relief that is more focused on retirement and abolishing investors relief.
Kathryn Cearns, OTS chairman, said: "The report highlights many features of CGT which can distort behaviour. This report breaks new ground for the OTS, setting out a framework of policy choice about the design of the tax for government to consider."
Sunak commissioned the report in July but is not bound to accept or implement any of its findings. The Chancellor needs to fill the fiscal hole created by the Covid-19 pandemic, but many of the recommendations would affect more wealthy taxpayers, who are traditionally Conservative voters.
The OTS - using HMRC data - estimated that bringing income tax and capital gains tax in line could provide the Exchequer with an additional £14bn, although it conceded that the amount raised was likely to be less in practice as people changed behaviour.
In the 2017-18 tax year, £8.3bn of CGT was paid, with £55.4bn of net gains (after deduction of losses) reported by 265,000 individual UK taxpayers. During the same period, 31.2m individual taxpayers paid £180bn of income tax.