After months of negotiations, the UK and European Union came to a withdrawal agreement on Christmas Eve, just before the end of the Brexit transition period…
The office of tax simplification (OTS) has recently released its first report on the possible simplification of capital gains tax (CGT). The report is 135 pages long and examines the policy and principles underpinning CGT.
So why should this interest you? It makes some revolutionary recommendations that whilst are only recommendations, would certainly affect tax planning for farmers and landowners in fundamental ways. The three most eye catching of these recommendations are examined below.
At the moment, CGT rates are at a historically low level. Gains on the sale of farmland for instance will be taxed at 20% to the extent that you are a higher rate tax payer. As recently as 2008, capital gains were treated as if they were your highest slice of income and taxed accordingly at the income tax rate of 40%.
The report recommends aligning the CGT and income tax rates once again, which would more than double the tax due on the same transaction, given that we now have a top income tax rate of 45%.
In addition, the report also recommends reducing the number of CGT rates. For example, if you sell a piece of land the tax rate applicable to this could be 10%, 18%, 20%, 28%, or even possibly 45%. As well as the use to which the land has been put, the rate will also depend on your income level in the year that you make a capital gain. The view is that simplifying the rates will reduce what HRMC see as avoidance.
Whatever is decided there is nothing in this report to suggest that CGT rates are likely to be going anywhere other than up. Should you be taking any action now?
Uplift on death
One recommendation which has been made previously in the context of inheritance tax is the removal of the CGT uplift on death. This is repeated in this report. Currently if you die holding an asset then the person who receives this on your death will receive it at its market value at that time.
The report recommends that this uplift is removed where a relief such as business property relief (BPR) or agricultural property relief (APR) applies.
If the asset remains in the family forever, then this would not be an issue. However, when it is sold, the gain will be much more significant because the only deduction will be for historic cost.
In fact, the report goes even further and suggests that the uplift on death could be removed altogether with the person inheriting the asset acquiring it at its historic base cost. This could be combined with a rebasing of all assets or the extension of holdover relief to all assets. This would be a significant change and seems to fall outside of pure ‘simplification’.
This uplift on death is potentially very valuable for farmers and landowners who have historically inherited valuable assets where the availability of APR or BPR has meant that the asset has passed to the next generation without any CGT or IHT having been paid.
Clearly any changes would have implications and we could see assets being relinquished to the next generation earlier, which might not be a bad thing. However, if assets are subsequently sold more CGT will be payable.
The report recommends that the relief previously known as entrepreneurs’ relief which relieves gains made when a business or part of a business is sold should be refocussed. Entrepreneurs’ relief has been continuously tinkered with since it was brought in in 2008 and the concern is that it doesn’t really help those that it should.
While this is only a report giving recommendations to the Government, it is clear that CGT will be in the Chancellor’s sight and as a result it is reasonable to assume that the rates of CGT are only likely to head up and that the removal of the CGT uplift will now be being seriously considered.
Whilst you shouldn’t make any decisions based on this report alone, now may well be a suitable time to think carefully about tax planning and whether action should be taken to realise or gift assets.
It is difficult to see a more favourable position for capital gains in the near future, so perhaps it is time act now, as better the devil you know, than the devil you don’t!