The Office of Tax Simplification (OTS) has released proposals to simplify capital gains tax in a new report following on from its review into Capital Gains Tax requested by the Chancellor in July 2020.

The report covers a wide range of areas – from moving home to getting divorced, running or investing in a business or issues affecting land transactions. It also highlights a broader concern about the low level of public awareness of the tax, and the extent to which the administrative systems could do much more to support taxpayers.

The report makes 14 recommendations, including:

Integrating Capital Gains Tax into the Single Customer Account

There are three main ways of reporting a capital gain – through Self-Assessment, the UK Property tax return for disposals of UK residential property, and the ‘real time’ Capital Gains Tax service.

The OTS recommends HMRC integrate these into the new Single Customer Account, making it a central hub for Capital Gains Tax data, to ease the administrative burden for the 500,000 or so people who file returns of disposals in a typical year.

Bill Dodwell, OTS Tax Director said: “Integrating Capital Gains Tax into the Single Customer Account is a natural ambition for this vital HMRC programme and would reduce the need for people to fill in a full Self-Assessment return just because they need to report a capital gain.”

UK Property tax return

Around 150,000 individuals make a disposal of UK residential property each year, 85,000 of whom have a taxable gain and need to file a UK Property tax return within 30 days.

Even with adequate awareness and preparation the OTS considers that 30 days is a challenging deadline, even if this return were integrated into the Single Customer Account.

The OTS recommends the government consider extending the reporting and payment deadline for the UK Property tax return to 60 days, or mandate estate agents or conveyancers to distribute HMRC provided information to clients about these requirements.

Private Residence Relief nominations

Private Residence Relief takes main homes outside the scope of Capital Gains Tax. Where taxpayers have more than one eligible home, they can choose which home they wish to benefit from the relief by making a nomination to HMRC.

The OTS accepts that at present there is insufficient awareness of the nomination procedure among the 1.4 million people who own second homes and says it is also peculiar that nominations are needed even where no capital gain can arise on a rented second home.

It recommends the government review the practical operation of Private Residence Relief nominations, raise awareness of how the rules operate, and in time enable nominations to be captured through the Single Customer Account.

Divorce and Separation

Married couples or civil partners can transfer assets between them without triggering an immediate Capital Gains Tax charge.

Divorcing or separating couples continue to benefit from this rule in the tax year in which they separate. However, after that, transfers take place at market value in accordance with the normal Capital Gains Tax rules.

Dowell said: “In 2020 it took an average of a year to secure a divorce in England and Wales. Everyone who commented on this issue considered that limiting the tax rule about these transfers to the tax year of separation give couples inadequate time to reorder their affairs.”

The OTS recommends that the government extend the operation of this rule to the later of:

  • the end of the tax year at least two years after the separation event
  • any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a court or equivalent processes in Scotland.

Kay Ingram, public policy director at financial planners LEBC welcomed all the proposals, especially this one to extend the period over which separating and divorcing spouses and civil partners can retain the inter spouse exemption when transferring assets between each other on divorce.

She said: “Currently the exemption is kept only for the tax year of separation.  The OTS are proposing to make this two years following the tax year in which the separation has occurred. This gives divorcing couples more time to settle their financial affairs when splitting, before they become liable to pay capital gains tax.

Ingram said: “The OTS proposal to extend the period over which married couples and civil partners can transfer assets between each other without paying capital gains tax for up to two years after the tax year of separation is welcome.  However, many couples separating do not realise that separation will affect their eligibility for a number of tax concessions, CGT being just one.

“Exemptions from inheritance tax, and eligibility for marriage allowance and some State and private pension benefits are also lost on divorce.  With the law about to speed up the divorce process to six months from start to finish*, couples need to address the financial split ahead of the legal process starting or they could be facing unexpected tax bills, loss of pension benefits and inheritance rights.”

Treatment of deferred proceeds when a business is sold

The proceeds from the sale of a business or land can be received in several different ways. Sometimes the proceeds of a sale might be paid over a number of years, or the proceeds could be a combination of cash and other assets such as shares. In addition, a business can be sold for an uncertain price that depends on future events.

The OTS says some of these more complex types of business and land sales create practical tax issues which can result in tax needing to be paid upfront before any cash has been received, distorting commercial decision making, and which are difficult for taxpayers to understand.

It therefore recommends the government consider whether Capital Gains Tax should be paid at the time the cash is received in situations where proceeds are deferred, such as on the sale of a business or land, while preserving eligibility to existing reliefs.

Dodwell said: “Together these two reports make up the most comprehensive review ever conducted of the tax and the practical experience of those who report or pay it.

“Many people have limited awareness or understanding of Capital Gains Tax. As the tax tends to affect taxpayers on a one-off basis (over 70% of those paying it in the eleven tax years to 2017-18 did so only once in that period), they do not so readily pick up the knowledge and experience that comes from dealing with something regularly.

“This means it is particularly important that the rules, and HMRC’s guidance and processes, are intuitive and fit with the practicalities of life, so far as possible.”

*Divorce Dissolution and Separation Act will become law in the Autumn of 2021.

Further reading: Capital gains tax threat and how this might impact investors