The Office of Tax Simplification (OTS) has now released the second part of its review into Capital Gains Tax (CGT). To briefly recap, the Chancellor originally commissioned the OTS to undertake such a review last July. They released their first part (which was focused on policy design) in November 2020 and you can find my article on that here. This second part is focused more on the administrative/practical side of CGT. This side of taxation is invariably less head-lining grabbing than the policy side, but it is important nevertheless.
In total, the OTS make 14 recommendations within this second report. As with the first report however, I should again stress that the Government are not bound by the contents of the report. They are merely recommendations. The Government could adopt all of them, some of them, or none of them.
The full report can be found here. But to summarise some of the main recommendations for you:
- Allow for separate share pooling
When a taxpayer makes multiple acquisitions of the same shareholding, such acquisitions are “pooled” together. This means that if, for example, a taxpayer owns 500 shares in ABC limited and chooses to sell 100 of those shares, his cost of those shares will be a simple average of the 500 pooled shares (ie 20% of the total cost of those 500 shares) – regardless of when he acquired them. This is relatively straight forward enough where all those shares are held in the same portfolio – indeed, the investment manager will most likely undertake the calculation for the taxpayer. However, problems arise where those shares are held in different portfolios. This is because the share pooling rules require all shares (of the same shareholding) to be pooled together, rather than just all shares within the same portfolio. It can lead to a rather strange scenario of a purchase made in one portfolio having a direct impact on a sale made in a different portfolio. Any calculations undertaken by an investment manager will often have to be ignored, and re-computed manually.
The OTS therefore recommend that this is changed, so that shares in separate portfolios can be pooled separately.
- Extend the ‘no gain no loss’ rule for separating couples
For CGT purposes, assets which are transferred between married couples (or civil partners) who are not separated are treated as being transferred on a ‘no gain no loss’ basis. This essentially means that the donor spouse (ie the one making the transfer) is deemed to receive value equal to the cost of the asset being transferred – ie their CGT computation is always cost minus cost equals zero. For example, if they acquire a property for £500,000 and later transfer it to their spouse when it is worth £700,000, they do not realise a capital gain of £200,000. The £700,000 value is ignored, and their CGT computation instead reads £500,000 minus £500,000 equals zero. In turn, the donee spouse (ie the one receiving the transfer) is deemed to acquire it at £500,000 – meaning that they “inherit” the unrealised gain of £200,000.
When a married couple decide to separate, this ‘no gain no loss’ rule continues until the end of the tax year in which the separation occurs. From day one of the next year, it ceases to exist. Instead, it is invariably the case that transfers between them would take place at market value (ie the computation for the above example would instead read £700,000 minus £500,000 equals a gain of £200,000 for the donor spouse).
Given that it is arguably unrealistic to expect a separating couple to have sorted out their financial affairs by the end of the tax year in which they separate – particularly if they only separate towards the end of the tax year – the OTS recommend that the ‘no gain no loss’ should be allowed to continue for at least two further tax years.
- Extend the submission/payment deadline for UK Property Disposal Returns
Since April 2020 it has been a requirement for certain disposals of UK property to be reported to HMRC through their own unique tax return (the exact rules on which disposals need to be reported depend on whether the taxpayer is UK resident or non-UK resident). However, where such a tax return is required, the deadline is just 30 days after the completion date. This is an incredibly challenging deadline, particularly for taxpayers who aren’t aware of their need to submit such a tax return until after they have sold their property.
Consequently, the OTS recommend that this is extended to 60 days. Furthermore, they also suggest that estate agents or conveyancers should be obligated to inform their clients about such a potential reporting requirement, including providing them with information published by HMRC.
- Change the way that gains/losses are calculation for foreign assets
Where the disposal of a foreign asset is within the scope of CGT in the UK, it is currently the case that the various elements of the CGT computation (eg sale price, acquisition price) must be converted into sterling using the exchange rate which was applicable at the time that element arose. Not only is this more complicated than simply undertaking the entire computation using the foreign currency and then applying an exchange rate to the answer, but it can also lead to a very different result. For example, what looks like a foreign loss could actually be a UK gain.
The OTS recommend that only the final answer should be exchanged into sterling.