In May 2021, the Office of Tax Simplification (OTS) published Capital gains tax – second report: Simplifying practical, technical and administrative issues. This came after the chancellor requested a review of CGT to “identify opportunities related to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent”, according to the report’s foreword.
The first report, Simplifying by design, published in November 2020, focuses on the policy design and principles underpinning CGT, and the second report looks at key practical, technical and administrative issues of the tax.
Here, Graeme Stenson, Chartered MCSI, tax adviser at KA Watson Consultancy, walks us through some of the second report’s recommendations and his thoughts on practical problems and benefits that might arise from potential changes to CGT.
Recommendation 1 from the OTS report: "HMRC should integrate the different ways of reporting and paying CGT into the Single Customer Account, making it a central hub for reporting and storing Capital Gains Tax data."
What would be the operational implications of this?CGT on share transactions is currently reported on the annual Self-Assessment Tax Return, but sales of residential properties (at a gain) now must be reported within 30 days, so this makes reporting much more cumbersome. It makes sense to integrate as intended and keep all the data in one place, otherwise it will be difficult to ascertain the current CGT position and in particular net off any losses.
Recommendation 2: “The government should formalise the administrative arrangements for the ‘real time’ CGT service, effectively making it a stand-alone CGT return that is usable by agents."
What would be the benefit of this?We cannot see any real benefit in reporting early as other transactions may occur afterwards but in the same tax year. Many clients will have different assets and the overall position cannot be determined until the tax year has ended.
Recommendation 3: "The government should consider extending the reporting and payment deadline for the UK Property tax return to 60 days, or mandate estate agents or conveyancers to distribute HMRC provided information to clients about these requirements."
What difference would it make to businesses if the reporting and payment deadline were to be extended from 30 to 60 days?This would be a great benefit as 30 days is a very limited amount of time. We agree that estate agents and conveyancers should inform clients that they need to report sales within the timescale and the consequences of not doing so. The earlier in the process that they do this the better for all concerned.
Recommendation 4: "The government should consider whether individuals holding the same share or unit in more than one portfolio should be treated as holding them in separate share pools."
What is the current process regarding share pooling, and what are the operational implications of the change? At the moment, assets are treated as if they are the sole holding. Although the separate pool idea is fine in concept, we would be concerned that anti-avoidance legislation would make this an administrative headache and not lead to any real simplification. In theory it would be easier if each investment portfolio were treated separately, but it would give the investor the opportunity to cherry-pick transactions to produce the most tax-effective result.
Recommendation 7: "The government should extend the ‘no gain no loss’ window on separation to the later of: the end of the tax year at least two years after the separation event; or any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a court or equivalent processes in Scotland."
What would be the impact on clients of extending the ‘no loss no gains’ window?Currently, as the report explains, “Married couples or civil partners can transfer assets between each other without triggering an immediate CGT charge.” ‘No gain no loss’ “means that the base cost of the asset transferred from the previous owner is inherited by the new owner”. When a couple separate prior to divorce, any transactions after the end of the tax year in which separation takes place are treated as if the couple are already divorced for CGT purposes.
Extending the window would be a massive benefit and make life so much simpler for all parties. It would be fairer and lead to lower costs and less anxiety for those already feeling vulnerable and nervous and who would not be aware of the rules.
Recommendation 8: "The government should consider whether CGT should be paid at the time the cash is received in situations where proceeds are deferred, such as on the sale of a business or land, while preserving eligibility to existing reliefs."
Would this simplify the current process? Yes, greatly. The current situation often leads to the issue of loan notes and then the complication of determining whether they are qualifying corporate bonds (QCBs) – ‘corporate bonds’ is a general commercial term for securities issued by companies to raise debt finance, which does not have any special tax significance except in the process of identifying qualifying corporate bonds. In order to be treated as a QCB, a corporate bond must meet 12 criteria, set out by HMRC, relating to the characteristics of the security and the underlying debt.
Also, the vendor may often not appreciate the reason for these instruments and not be aware of the tax implications of a later disposal and receipt of deferred consideration.
Recommendation 9: "The government should consider enabling an irrevocable provision in the documentation for a corporate bond to specify that it is subject to Capital Gains Tax, and for the absence of such a provision to mean that it is exempt."
This change would allegedly avoid inserting complex clauses and the outcome would be "more intuitive for taxpayers". How would these changes make things easier operationally?This would create some certainty in this murky area and ensure that transactions are recorded correctly on tax returns. This would also enable planning with confidence for clients and hopefully less need for warranties and/or indemnities in the legal agreements.
Recommendation 10: "The government should review the rules for enterprise investment schemes (EIS) with a view to ensuring that procedural or administrative issues do not prevent their practical operation."
What would you like to see put in place to help the operation of EIS?We would like to see a more straightforward process that does not always require lengthy professional assistance, such as less stringent and simpler rules regarding entitlement to the different tax reliefs. For example, investors are not entitled to CGT exemption unless they have qualified for income tax relief. This has led to confusion as to what constitutes tax relief for the investor.
Recommendation 11: "The government should consider whether gains or losses on foreign assets should be calculated in the foreign currency and then converted into sterling."
What would the implications be for those operating mainly in sterling and how can we make things simpler for those taxpayers operating foreign bank accounts?This would be sensible as the current need to convert currency on every overseas transaction, for example, makes the process cumbersome and taxpayers do not understand the reason for the requirement. The new proposal simplifies this by accounting for foreign exchange rates at the time when the disposal takes place, removing the need for taxpayers to refer to old records.
Recommendation 14: "HMRC should improve their guidance in the following areas: UK Property tax return; lodgers and people working from home; when a debt is a debt on a security; when a loan to a business becomes irrecoverable; when Business Asset Disposal Relief could apply to farmers or others looking to retire over a period of time; enterprise investment schemes; land assembly arrangements; flat management companies."
Which of those issues are most pressing, and which would have the biggest impact if they were to change?The most important is categorising a debt on a security as this causes unnecessary complications and can lead to great expenses, too. Operations wise, this would really create certainty. The UK property tax return has been complicated by the restrictions on individual’s interest relief and other disallowances. Improving the categorisation of a debt on security would have the biggest impact.
About the expert
Graeme Stenson is technical tax adviser at KAWC. He has extensive experience of providing support and validation for their team of tax experts as well as writing a regular blog on topical issues and changes in the sector.
Do the recommendations in this report amount to a simplification?Not as much as the title would suggest. Reporting transactions on a more regular basis does tend to complicate matters and pooling shares at the investment manager level may not always lead to less work.
Are there any areas that you feel the OTS has missed?Greater clarity on the different deadlines for different taxpayers and an easier process to report gains if the vendor does not have a unique taxpayer reference. Also, maybe a dedicated HMRC helpline for advice on property disposals.
Which recommendation would provide the most worth to individual taxpayers and investment managers/businesses?Clarifying the tax treatment on financial instruments, for example QCBs, in advance and extending the timelines on separation transactions would be a positive change for all concerned and reduce the stress the current systems can cause at a time when taxpayers are naturally anxious.