The Treasury has responded to the Office of Tax Simplification's (OTS) reports that were issued over the past couple of years on Inheritance Tax (IHT) and Capital Gains Tax (CGT).
Some, but not that many, of the OTS's recommendations will be implemented while others have been rejected.
The OTS published its report on the Simplification of IHT in July 2019. This outlined eleven recommendations including reforming the exemption for “normal” expenditure out of income, and changing the scope of reliefs such as Business Property Relief (BPR). For BPR specifically they had suggested potentially aligning the trading status assessment to the so-called 80:20 test of activities that is used for the equivalent CGT reliefs, rather than the 51:49 threshold that exists for BPR.
The good news is that, at present, the Government has decided not to proceed with any changes to the regime.
However, the nil rate band has remained frozen at £325k (it hasn’t increased in over 10 years now) and therefore lots more estates are going to be suffering more IHT at 40% in future, and planning to mitigate this while the current relatively benign system remains in place is advisable.
Capital Gains Tax
In the OTS’s second report on CGT, ‘Simplifying practical, technical and administrative issues’, published in May 2021, fourteen recommendations were made.
Five of these recommendations have been accepted for implementation in the near future as they are seen to offer practical benefits for taxpayers. These are:
- Extending the spousal “nil gain nil loss” window on separation – currently this only lasts until the end of the tax year of separation but it looks like this will now have a longer limit as yet undecided.
- Improving guidance in a number of areas – this will include subjects such as loans to businesses, Business Asset Disposal Relief in phased retirements and flat management companies.
- Extending the scope of Rollover Relief rules where land is acquired under compulsory purchase orders - reinvestment in enhancing land already owned will be included within the scope of the relief.
- Integration of the different ways of reporting and paying CGT – the idea being that this then comes into a Single Customer Account (SCA).
- Extending the reporting and payment deadline for the UK property return to 60 days – this measure was announced in the Autumn 2021 Budget and has already come into effect.
The Treasury's letter indicates that a further five OTS recommendations will be kept under review. This includes proposals such as treating the same shares held in more than one portfolio as being in separate share pools for base cost purposes, the practical operation of Private Residence Relief (PRR) nominations and enabling nominations to be captured through an SCA.
The four remaining recommendations by the OTS were rejected
by the Treasury. These being:
- Adjusting PRR to cover developments in a taxpayer’s garden which the taxpayer subsequently occupies – the current rules are quite harsh in a scenario whereby a taxpayer builds a new home for themselves within their existing garden, then sells their old home and moves across. The PRR qualifying occupation period for the new home only starts from the date of occupation and loses the history of being within the garden/curtilage of the old home since that land was acquired.
- Collecting CGT more immediately when cash is received in situations where sales proceeds were partly or wholly deferred.
- Calculating gains and losses on foreign assets in the relevant foreign currency before converting into sterling – at present each item in the capital gain calculation gets converted at the spot rate, meaning that a taxpayer who hasn’t realised a gain in the foreign jurisdiction could still have UK Capital Gains Tax to pay by reference to any exchange gain deemed to have arisen.
- Removing CGT or Corporation Tax charges where a freeholder is in effect only extending their own lease – leases are a complex area of tax law riddled with pitfalls and any simplification in this area would have been welcomed.
Although not specifically referenced in the Chancellor’s response, the inference in addressing the May 2021 OTS recommendations and not the November 2020 OTS recommendations (which included more extreme ideas such as aligning Capital Gains Tax rates with income tax, and the abolition of re-basing of assets to probate valuations on death) is that those proposals are not being seriously considered at the present time.
Again as with the IHT situation, this doesn’t mean that ideas such as the removal of CGT re-basing on death will not come back into the spotlight within the next few years, and so we would advocate against relying on that relief remaining in place for the longer term as part of an overall taxation plan for an estate.
If you would like our input with your estate and succession planning, please don’t hesitate to contact us.
This article is from the latest issue of our Construction, Land and Property Bulletin - Spring 2022. To receive future copies of any of our newsletters directly to your inbox please visit our preference centre and register your interest.
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