Tax changes – A further warning

Earlier this year, we highlighted the potential changes which may be a foot in relation to Inheritance Tax following the presentation of two reports to the Government (one from an all-party parliamentary group and another by the Office of Tax Simplification).

A further report has now been issued by the Office of Tax Simplification on 11^th November 2020, this time focusing on Capital Gains Tax. This follows a request by the Chancellor in July 2020 to look at administrative and technical issues in relation to Capital Gains Tax and a public consultation.

Capital Gains Tax is a tax which is chargeable when an individual makes a disposal whether by gifting or sale of an asset. It is the value of the gain made on the asset which is chargeable rather than the actual value of the asset, i.e. the difference in value between when an individual acquired the asset compared with its value when disposing of the asset.

The latest report claims that the current Capital Gains Tax regime is counter-intuitive and creates “odd” incentives. The current Annual Exemption in relation to Capital Gains Tax is considered relatively high (currently £12,300 per annum) and the Office of Tax Simplification recommends looking at a reduction in this exemption. The report also states that the inconsistencies between Capital Gains Tax and Income Tax can encourage taxpayers to arrange their affairs so that some income is treated as a capital gain, which can therefore be more advantageous in terms of the tax paid.

A further conclusion within the report is that the current Capital Gains Tax rules encourages business owners to transfer the business on death rather than during lifetime due to the uplift available in Capital Gains Tax on death. The Office of Tax Simplification recommends removing the uplift with the beneficiary taking on the deceased’s base cost. It also recommends replacing Business Asset Disposal Relief (previously Entrepreneurs’ Relief) with a relief more focused on retirement. A further report will follow early next year which will explore key technical and administrative issues in terms of Capital Gains Tax.

Although the report claims that relatively few people actually end up paying Capital Gains due to the reliefs available, business owners could be affected if the proposals are adopted. In terms of agriculture, the main impact would be as a result of any changes made to Holdover Relief. Holdover Relief defers the payment of Capital Gains Tax on a business asset, meaning that at the point of transfer, no Capital Gains Tax is due if a holdover election is made. The payment would only become due if the transferee later decided to dispose of the asset themselves, and the tax due would be based on the increase in value from the transferor’s base value and the value of the asset at the time the transferee disposes of it.  This relief effectively allows farms to be passed on during lifetime without Capital Gains Tax becoming payable at the point of transfer.

The latest report estimates that around £14bn could be raised if exemptions were cut and Capital Gains Tax rates doubled. Given the current unprecedented spending as a result of Covid-19, the Chancellor will be considering these recommendations very carefully, although he did state in September that there would be “[no] horror show of tax rises with no end in sight”.

In light of this most recent report together with the previous warnings, it would be fair to assume that change may come. What that change will be or look like remains uncertain. We would therefore recommend seeking advice at an early stage and reviewing your current succession plans to ensure that assets can be transferred in the most tax efficient way.

For further advice and information, please contact Manon Williams on 01239 710942.