1 Sep 2020
Capital Gains Tax - Are there clouds on the horizon?
It was Harold Macmillan who, in 1957, came up with the phrase "most of our people have never had it so good." Whilst he was referring to the economy generally, the sentiment is often applied by commentators to the capital tax status of agriculture. When one compares the current Inheritance Tax (IHT) regime to the somewhat punitive one of the early 1980’s which older practitioners can still recall, the combination of 100% business and agricultural reliefs, a single flat rate of tax, transferrable allowances and potential exemption for lifetime transfers would have been a practitioner’s dream 40 years ago. Sadly, these are now sometimes taken for granted, but with the impact of the Covid support package looming over public finances it would be a worthwhile exercise to dust off an old textbook by way of illustration.
Whilst the Treasury has hitherto shown limited enthusiasm for IHT reform, there is no guarantee that this will still be the case post Covid. The position as regards Capital Gains Tax (CGT) is possibly even more ominous. CGT has had a chequered pathway over the decades, with rebasing points in 1965 and 1982, indexation allowances given, enhanced, frozen and removed and rates varying between 10% and 40%. Reliefs on retirement have been subject to change to an almost annual basis. One could conclude that the Government have felt with CGT that the tax has “never been quite right”.
On the back of all this the Office of Tax Simplification was, in July, instructed to review the principles and practical operation of CGT. In the call for evidence, it notes that the tax is a “modest source of revenue for the Exchequer” and it asks for broad thought about current rules on allowances, exemptions and reliefs, losses and interactions with other taxes. Without drilling too far into the detail, it is easy to see that its findings might include the boundaries between Income Tax and CGT, particularly where assets are only held for a short time. They might also include the complexity of CGT rates (almost infinite, given the interaction with income levels) and the perceived anomaly where an asset is given a CGT uplift on death even if no IHT is paid. Interestingly, no mention is made of the fact that most long-term capital gains include a very substantial element of inflationary uplift.
It is of course possible that the findings of the OTS are that the tax is perfect, and it is also possible that the Treasury will conclude that a new rebasing date is long overdue or indeed that the exemptions should be increased or the rates reduced. Given the long-term impact of the Covid support package on the public finances, these outcomes seem improbable.
Currently, it is often relatively quick and easy to transfer business assets and capital gains can usually be held over. Whilst it may not be the case that “our people have never had it so good” in this respect 100% CGT retirement relief was rather useful, they certainly could have it considerably worse.
Commenting on the issue, MHA agriculture partner Andrew Perrott remarked “We have been sensing changes in the air regarding CGT for a while now. Everything points towards an announcement this autumn, so those who have transactions planned should really give some serious thought to putting them in hand sooner rather than later”