Government rejects proposals for fundamental changes to capital taxes

Natalie Miller

Taxpayers have been in limbo for several years, wondering whether the Government would act on any of the recent proposals for changes to capital taxes.

In a response to the Office of Tax Simplification (OTS) which prepared four proposal papers, HM Treasury (HMT) has confirmed that there are no plans to make any changes to inheritance tax (IHT) and that there will just be some minor changes to capital gains tax (CGT).  

Changes to Capital Gains Tax

On the CGT side, one proposal which the Government has accepted is the welcome extension of the reporting and payment deadline for UK property returns to 60 days, as already announced in the recent Autumn Statement. 

Another welcome change is the proposed extension of the ‘no gain, no loss’ window on separation and divorce – under current rules, transfers are only ‘tax neutral’ in the tax year of formal separation and this can cause significant difficulties where it takes longer for a couple to agree their financial settlement. However, we will need to wait for consultation to know how much longer they will have and when that extension will be introduced. 

It’s important to note not only that HMT don’t rule out looking at these proposals again in the future, but also that both taxes raise significant sums which can support hard-pressed public finances.

Improvements are generally good news, as is the possibility that we have (hopefully) some security in knowing what the rules will be for the foreseeable future. However, it’s important to note not only that HMT don’t rule out looking at these proposals again in the future, but also that both taxes raise significant sums which can support hard-pressed public finances so moves to increase that ‘tax take’ shouldn’t be ruled out. More fundamentally, not addressing underlying issues, however difficult that might be, means that many of the problems and anomalies identified by the OTS will remain in place.

The response from HMT considers several reports from the OTS, all of which were originally commissioned by HMT and these are show below, to highlight the sheer breadth of the proposals.

  • The OTS published its first report on IHT in 2018, setting out the complexities and issues involved in what has always been a contentious tax.  They highlighted the benefits of reducing administration for smaller estates, and simplifying, standardising and automating the administration and guidance of the tax.  
  • The second OTS report on IHT was published in 2019 and considered the design complexities of IHT.  The report contained eleven recommendations which the OTS felt would deliver a more coherent an understandable structure of the tax.
  • A parliamentary group published a separate paper in February 2020 proposing a radical overhaul of the IHT rules, effectively replacing it with a tax on lifetime and death transfers of wealth, with very few reliefs but a low rate of tax.
  • The first OTS report on CGT was published in 2020, setting out a framework within which the government could simply the design of the tax to make it more efficient and more understandable.
  • The second OTS report on CGT was issued in May 2021, highlighting the low level of public understanding of the tax and proposing changes in circumstances such as moving home getting divorced, and running and investing in businesses.
  • Among the proposals were some suggestions which could have had significant changes on tax planning, including the potential removal of CGT uplift on death, CGT rebasing of all asset values at 2000, a reduction of the relevant IHT period from seven to five years, and the abolition of Investors Relief. 

No changes to Inheritance Tax

On IHT, the Government has decided against proceeding with any of the changes proposed by the OTS or the parliamentary group, although their statement included the caveat not only that this was their view “at the moment” and that they would “bear [the] very valuable work in mind if the Government considers reform of IHT in the future”.  

Further changes to Capital Gains Tax

On CGT, the Government has accepted five recommendations from the second OTS report. One recommendation, which was announced in the recent Autumn Statement, is the extension of the reporting and payment deadline for UK property returns to 60 days. Others which have been accepted are making CGT part of the Single Customer Account programme; extending the ‘no gain, no loss’ window on separation and divorce; expanding rollover relief to cover costs associated in enhancing land already owned; and improving guidance on some specific areas. 

Proposals which have been specifically rejected include those to adjust private residence relief to cover garden development, to move the CGT charge on deferred consideration to the point at which cash is received and to change the way in which gains and losses are calculated on foreign assets. 

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