Tuesday, November 17, 2020
More closely aligning UK capital gains tax (CGT) rates with income tax rates could raise significant revenues for the UK, a government-commissioned review has concluded.
The UK's Office for Tax Simplification has released a new report on overhauling the UK's CGT system.
In July 2020, the Chancellor asked the OTS to carry out a review of CGT, to "identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent."
The OTS has conducted a substantial consultation exercise and has now released the first of two reports – the first on the policy design and principles underpinning the tax; the second, which will follow early next year, will explore key technical and administrative issues.
Presently, there are four different rates of CGT. All are lower than the equivalent standard rates of income tax. The rates depend on the income tax status of the taxpayer and the type of asset disposed of.
The paper considers raising CGT rates, by as much as double, to raise tax revenues and remove complexity from the tax system. It explains arguments for and against. For instance, the paper notes that some argue that the disparity is justified to reward risk taking and promote enterprise. However, it notes that the decision to diverge from neutrality (in the treatment of taxpayers based on their choices) should be done with a full understanding of the economic, social, and fiscal costs and benefits.
The report says: "A greater alignment of rates would reduce the need for complex rules to police the boundary between income and gains, as the way income is classified would not affect the tax position."
"Alternatively," the paper says, "the issues arising from the disparity in rates could be addressed at the boundary between income and gains. The two key areas where the OTS considers the boundary is under pressure are the use of share-based remuneration, and the accumulation of retained earnings in smaller owner-managed companies."
Were the Government to align rates of CGT with income tax, there would be significant behavioral effects, the paper says, including regarding people's willingness to dispose of assets and trigger a tax charge, increasing the extent to which CGT has a "lock in" effect. In addition, an increase in rates would highlight other issues, the paper says – namely:
There is also a case, the OTS said, if rates were increased, for considering a greater degree of flexibility in the use of capital losses in some situations.
The paper also considers simplifying rates of tax. It would be administratively simpler for most taxpayers if there were two rates of CGT, rather than four, and if there were less or no interdependence with income tax rates, the paper recommends. The report also considers the revenue impact of reducing the Annual Exempt Amount.
The paper notes that the total amount of CGT paid for the 2017-18 tax year was GBP9bn, on net gains (after deduction of losses) of GBP58.9bn. Of this amount, GBP8.3bn was paid by individuals, and 71 percent of these taxpayers were aged between 45 and 74.
The paper suggests that, on a static basis, alignment of CGT rates with income tax rates could theoretically raise an additional GBP14bn a year for the Exchequer.