Review of Capital Gains Tax suggests additional taxation measures will need to be found

OTS found the current CGT structure “distorted behaviour”

The Chancellor asked the Office for Tax Simplification (OTS) to review the current Capital Gains Tax (CGT) rules and on 11th November the OTS published their first report.

The headline is that the OTS found the current CGT structure “distorted behaviour” and was often counterintuitive with “odd incentives”.  More specifically they observed that the disparity in rates between Capital Gains Tax and Income Tax can distort business and family decision-making and incentivise people to re-characterise income as capital gains. 

This was directly addressed by Bill Dodwell, tax director at the OTS:

“If the government considers the simplification priority is to reduce distortions to behaviour, it should consider either more closely aligning Capital Gains Tax rates with Income Tax rates, or addressing boundary issues as between Capital Gains Tax and Income Tax.”

You download a full copy HERE

The highlights from the report of the OTS are:

  • CGT rates need to be aligned more closely to income tax rates which may mean the maximum rate of CGT (28%) could rise as high as 40% and 45% in England and Wales
  • The CGT annual allowance needs to be reduced
  • It has been recommended that the government introduce a broader exemption for personal effects if the CGT allowance is lowered
  • The rules surrounding Business Asset Disposal Relief (Entrepreneurs' Relief as was) will change
  • As the current CGT rates and reliefs are counter intuitive and distort the decisions of family and owner managed businesses the rates need to be addressed 
  • The “capital gains uplift” that allows beneficiaries to inherit an asset at market value on the date of death should be scrapped as it may not be best for the business, the individuals or families involved, or the wider economy

It is estimated that making the changes suggested in the report would generate around £14bn for the exchequer. However, Mr Sunak is reportedly looking for £200bn to try to address the hole in the public finances after public spending quadrupled from April to September. 

This would suggest additional taxation measures will need to be found.

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