On 14 July it emerged the Chancellor had written a letter to the Office of Tax Simplification (OTS) requesting it ‘undertake a review of Capital Gains Tax (CGT)’. Curiously, there was no announcement of the letter on the Treasury website.
The tone of the correspondence is distinctly different from Mr Hammond’s letter requesting a simplification review of IHT. Although Mr Sunak gives a nod to ‘opportunities to simplify the taxation of chargeable gains’ his letter also refers to:
- ‘areas where the present rules can distort behaviour or do not meet their policy intent’; and
- ‘any proposals from the OTS on the regime of allowances, exemptions, reliefs and the treatment of losses within CGT, and the interactions of how gains are taxed compared to other types of income’.
The OTS has already responded with a scoping document, a call for evidence and, as it did with inheritance tax (IHT), an online survey for individual taxpayers. Together these make clear that the review will be wide-ranging, covering areas including:
- ‘the overall scope of the tax and the various rates which can apply’;
- ‘stand-alone owner-managed trading or investment companies’;
- ‘interactions with other parts of the tax system’;
- ‘the practical operation of principal private residence relief’; and
- ‘consideration of the issues arising from the boundary between income tax and capital gains tax in relation to employees’.
What might they be looking at?
As was the case with IHT, the OTS has access to HMRC data that is not publicly available. One example of this is the 2017/18 distribution of CGT payers by highest income tax band:
The issue of how to treat capital gains for tax purposes has been around for decades. Of late many think tanks, such as the IPPR and the Resolution Foundation have called for gains to be taxed as income. Ironically, a Conservative Chancellor (Nigel Lawson) put that idea into practice in 1988. It survived for 20 years, albeit with various complicating tweaks along the way.
At the last election, the Liberal Democrats and Labour called for income tax rates to apply to gains. They also wanted to reduce the annual exemption to £1,000 (Liberal Democrats) or completely (Labour). The Conservative manifesto did not comment on it. Doubtless, the Government could argue the manifesto pledge not to increase income tax rates does not apply to capital.
CGT ‘is a modest source of revenue for the Exchequer’, to quote the OTS. The latest Office for Budget Responsibility (OBR) projections are that it will grow to £10.5bn in 2020/21 (on gains realised in 2019/20) and £7.6bn in 2021/22. Set against a 2020/21 deficit heading above £350bn, doubling capital gains tax revenue would make only a minor dent.
From a political viewpoint, CGT has similar advantages to a wealth tax’ This is because capital gains tax is perceived as a tax on the rich which will not affect most people (fewer than 300,000 taxpayers paid CGT in 2017/18). It also has the benefit of being an existing tax, so would not require new infrastructure. Having said that, there is an argument that with IHT already in the simplification pot, a case could be made for some rationalisation of capital gains tax and IHT into a single capital tax.