Richard Douglas-Home

In July 2020 the Chancellor requested that the Office of Tax Simplification (OTS) carry out a review of Capital Gains Tax (CGT). The OTS has now completed that review and its recommendations are set out in two reports; the first was published in November 2020 and the second in May 2021. In this article, we consider the contents of the second report, which is called “OTS CGT Review: Simplifying practical, technical and administrative issues”.

The OTS’s first report proposed some potentially major reforms to CGT, including aligning the rate of CGT with that of income tax and re-stating the interaction between CGT and inheritance tax.

The scope of the second report is more limited and focuses on practical issues. However, the OTS has addressed some notable flaws within the current CGT system and their recommendations should be welcomed. Key points are as follows:-

Method of reporting and paying CGT: At present, a capital gain can be reported in three different ways (i.e. a traditional self-assessment return and under two relatively new services for reporting disposals of residential properties). The OTS recommends integrating these services into a “single customer account” to reduce the administrative burden on taxpayers.

UK property tax return: When a property is sold and a CGT charge arises, a UK property tax return must be generally filed within 30 days of settlement. The 30-day deadline can be a tight deadline to achieve and the OTS recommends it is extended to 60 days. Please note that the filing requirement does not apply to the vast majority of residential property sales as principal private residence (PPR) relief often means that no CGT is payable on these sales.

Principal private residence (PPR) relief: As mentioned above, PPR reliefs provides an exemption in relation to a taxpayer’s main home and also its gardens/ground (within certain limits). It is an important relief and is utilised by millions of taxpayers every year. However, the OTS notes that the rules can produce “unexpected and distortionary outcomes” in certain situations. For example, the OTS cites the complications that can arise where a taxpayer builds a new house in their garden as the tax treatment can be very different depending on whether the taxpayer sells the land to a developer or builds the house so that they can occupy it. The OTS recommends introducing new rules to avoid unfair outcomes. It also highlighted the practical problems involved with the PPR nomination system which applies where a taxpayer owns more than one home.

Shares: Shares are “pooled” for CGT purposes where additional shares in the same company are acquired over a period of time at different prices. Where a part of the shareholding is sold, the base cost of the shares disposed of is calculated on the average purchase price of the entire shareholding. The need to pool shares becomes more complicated where a taxpayer has multiple portfolios held through different investment managers. In such a situation, the OTS recommends that the taxpayer should be treated as having separate pools to reduce the chance of making mistakes in reporting gains/losses.

Divorce and separation: Spouses or civil partners can pass assets between themselves without triggering a CGT charge. This rule applies to couples who are separating or getting divorced, but only if the transfer is made in the same tax year as date of divorce/permanent separation. This can lead to arbitrary outcomes depending at what point in the tax year a couple actually separate. The OTS recommends expanding this window for tax-free transfers to the later of: (1) the end of the tax year at least two years after the separation event; or (2) any reasonable time set for the transfer of assets in accordance with a court-approved financial settlement between the parties.

In summary, while none of the recommendations in the OTS’s second report on CGT are particularly radical, they do address some longstanding CGT issues faced by taxpayers and their advisers. This is especially true in relation to asset transfers on divorce, an area that has caused unnecessary complications for years.