All change for CGT?

02.06.2021
Natalie Miller
Tax, News

Capital gains tax (CGT) affects lots of key, often pressured, circumstances for individuals – selling your home, getting divorced, running or investing in a business, or developing a small piece of land. Despite this, many people don’t realise how the tax works, or how to report and calculate any tax that’s due.

A new report makes 14 recommendations for change across these areas, including integrating reporting into one single customer account; extending the reporting deadline for residential property disposals; extending the special rules for divorcing couples; and preventing some upfront tax payments when a business is sold.

We’ll be keeping an eye on these proposals to see which, if any, the government want to take forward.

Last week, the Office of Tax Simplification (OTS) issued its second review of capital gains tax (CGT) issues. Whereas the first review, issued in November 2020, covered the broad policy design and principles underpinning the tax, the new review suggests changes to a wide range of practical, technical, and administrative areas, based on the current system. It also highlights how little some people are aware of the tax and suggests changes which could help them.

One of the most frequent areas of confusion is selling your home.

Most people have a general understanding that they can make the most of rising property values by selling their home without any tax consequences and use the profit to move up the property ladder. However, they may not appreciate that this is underpinned by a specific relief, Private Residence Relief (PRR), which has complicated conditions, especially when they have more than one property.

There is a process by which you can nominate which property should get the relief but it’s not intuitive so that, for example, you have to consider a home which you rent, rather than own, even though you wouldn’t pay any tax if you sold it. The OTS recommends that the government review how this relief works, particularly when it comes to awareness, and recording of the nomination process. The report also suggests that the government consider amending the PRR conditions to cover developments in your garden.

When you sell residential property, your other big challenge can be reporting the disposal and paying any tax within just 30 days of completion. Here, the OTS suggest extending this to 60 days or mandating estate agents to provide relevant information to their clients.

Another area which can cause problems at a time when people are already likely to be very stressed is when couples split up. Married couple or civil partners can transfer assets between them without a CGT charge and this relief extends to the tax year in which they separate. However, after that, any transfer is deemed to take place at market value, often resulting in a tax charge. Given the length of time it can take to agree terms and secure a divorce, the OTS proposes extending the special rules to the later of the end of the tax year after separation or any reasonable time agreed in court.  

The other big disposal many people deal with is selling their business or land. These can often be quite complicated transactions and you may not get all your proceeds at once, and the amount you do get may depend on future events. Despite this, some of these transactions are taxed upfront before you receive the cash. The OTS suggests that this is reviewed.

There are further recommendations on how to identify which shares are sold when you dispose of part of a holding; the treatment of corporate bonds; rules of the enterprise investment scheme (EIS); the taxation of land acquired under compulsory purchase orders; what happens when a freeholder extends their own lease.

Even if you work your way through the all the rules, the process for telling HMRC about the disposal is complicated, especially as most people aren’t selling homes or getting divorced on a regular basis! This makes it important that both the guidance and the processes are made much easier to follow.

The report suggests specific areas of HMRC’s guidance which need review and, as a key point, recommend pulling all CGT reporting into one integrated customer account which you can use to report the disposal, pay your tax and which you can allow your agent to access to check for you. That same account could also keep track of claims that you’ve made in the past.

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