I have already welcomed one government initiative this morning, and now let me welcome another. The Office for Tax Simplification has announced a review of capital gains tax.
In the consultation document they say that this review will 'explore simplification opportunities across the following areas:
- the overall scope of the tax and the various rates which can apply
- the reliefs, exemptions and allowances which can apply, and the treatment of losses
- the annual exempt amount and its interactions with other reliefs
- the position of individuals, partnerships and estates in administration but not trusts or residence and domicile issues
- the position of unincorporated businesses, including the setting up, selling or winding up of such businesses
- the position of standâ€alone ownerâ€managed trading or investment companies but not the positions of large or group company structures
- any distortions to taxpayers' personal or business investment decisions interactions with other parts of the tax system such as Income Tax, Capital Allowances, Stamp Duty Land Tax (SDLT) and Inheritance Tax
This call for evidence explores structural CGT issues, challenges commonly affecting individual taxpayers, problems commonly affecting business owners and investors, the administration of CGT, the interaction between CGT and other taxes, and the wider CGT framework. Depending on an individual's personal circumstances there may be some overlap between these categories.'
I am on record as saying that we do not need a wealth tax, but that we do need to reform taxes in wealth. This is the logic of the part of the Tax After Coronavirus (TACs) project that addresses wealth. And this review accords exactly with that logic.
That this review also considers tax spillover effects is also very welcome.
If this is the direction for travel for the government's tax policy this is to be welcomed. I will be submitting to the review and would encourage others to do so. Materials to assist that process will be published soon. In the meantime, some is here.
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Simply equalising rates with income tax would go a long way to reduce distortions. Slashing entrepreneurs relief from £10m at 10% (rather than 20%) to £1m has already taken a lot of heat out of things.
But we have a new relief to replace it
What relief is that?
The extended version of this
https://www.rossmartin.co.uk/private-client-a-estate-planning/capital-gains-tax/4194-investors-relief-at-a-glance
Have I missed an announcement? In what way will investors’ relief be extended?
Investors relief is not entirely new. It was introduced in 2016, but the circumstances when it might apply are much narrower then entrepreneurs’ relief – in some respects, closer to EIS than ER. The investor (and connected persons) can’t be closely involved in the business – they must not be employees, and if a director, must be unremunerated. Whereas there was a time when almost any director/shareholder could get ER and save up to £1m of capital gains tax each.
It was changed in 2019, I agree
But many are now selling it as the new alternative…
You’ve totally lost me now. What was changed in 2019?
Entrepreneurs’ relief was restricted in 2019, by adding a requirement to have 5% of the economic ownership alongside 5% of the votes and 5% of the ordinary share capital, in the definition of a “personal company”. It was restricted again in 2020 (or at least will be with effect from 11 March, once the Finance Bill is passed) by cutting the lifetime allowance from £10m to £1m.
Investors’ relief is still at £10m, but no relevant changes were made to it in 2019. It includes a three year holding period after it was introduced in March 2016, so no one could have qualified for investors’ relief until last year. Is that what you mean?
People can qualify for IR if they satisfy the conditions, which are quite restrictive, but it won’t suit many who might have wanted ER.
If investors’ relief turns out to be too expensive, the £10m individual cap can be cut back to £1m in short order too. (In this connection, I could mention the short-lived folly of employee shareholder shares, introduced in 2013 and abolished in 2016.)
Well as I have read it there were changes in 2019…
I linked to a reference to that
But if I am wrong, apologies
Scrapping Private residence relief for gains not re-invested into another property would be a good start. Most of the gains made on people’s properties aren’t because of work they have done but because of infrastructure spending, which is paid for by taxation.
Partially scrapping private residence relief is in my view not a good idea. The people this would affect is more than likely to be the elderly moving into care homes or with family etc. you would then have to create so many exemptions that it would fail to meet any useful policy objective.
What would help is for HMRC to adequately police the sales of residential property to actively look for abuses.
An unearned gain is an unearned gain and should be taxed as such. Whether there should be a threshold exemption (comparable to the personal allowance for income tax), or how the tax rate(s) should be calibrated, are matters of detail. But as a matter of principle, it is difficult to see why should there be a blanket relief on capital gains made on residential property sales without any regard to the size of the gain or the fiscal position of the beneficiar(y/ies). The present arrangement simply compounds fiscal unfairness.
Apart from raising considerable tax revenue to fund the collective public realm, ending the main-residence ‘relief’ would go some way to staunching the widening inequality (increasingly inter-generational) between the property haves and have-nots, not least by keeping a lid on house prices.
The familiar hand-wringing about the supposed effect on the elderly is without merit. If ALL residential property sales (including primary residences) were taxed at – say – 20%, then the revenue raised could be used to fund proper third-age residential care for those who need it.
You can imagine how unpopular it would be to mess with the exemption for the principal private residence – an Englishman’s home is his castle and all, although owner occupation is around 60% and seems to be drifting slowly down as the amount of private rental jumps up, and the young (who cannot afford to buy) might have a different view on taxing the gains of those lucky enough to own their own place already.
The position in the US might give a useful point of comparison. As I understand it, in the US, gains from the sale of your primary residence are exempt up to $250,000 (for a single person) or $500,000 (for a married couple), but a person can only claim the exemption once in every two years. (As our Prime Minister found out to his cost before he gave up US citizenship, as a person born in the US and so a US citizen and thereby subject to US tax whether or not resident in the US, the US exemption is not as generous as the UK exemption.)
[…] front covers of the Times and Telegraph this morning both refer to the forthcoming capital gains tax review that I have already noted […]