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Capital Gains Tax – Second Report: Simplifying Practical, Technical and Administrative Issues

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Capital Gains Tax – second report: Simplifying practical, technical and administrative issues May 2021 Capital Gains Tax – second report: Simplifying practical, technical and administrative issues Presented to Parliament pursuant to section 186(4)(b) of Finance Act 2016 May 2021 © Crown copyright 2021 This publication is licensed under the terms of the Open Government Licence v3.0 except where otherwise stated. To view this licence, visit nationalarchives.gov.uk/doc/open- government-licence/version/3. Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned. This publication is available at www.gov.uk/official-documents. Any enquiries regarding this publication should be sent to us at [email protected] ISBN 978-1-911680-87-1 PU 3125 05/21 Printed on paper containing 75% recycled fibre content minimum. Printed in the UK by the APS Group on behalf of the Controller of Her Majesty’s Stationary Office. Contents Foreword 2 Executive summary 3 Chapter 1 Awareness & Administration 16 Chapter 2 Main homes 36 Chapter 3 Tangible moveable property 54 Chapter 4 Divorce and separation 60 Chapter 5 Business issues 65 Chapter 6 Investor issues 79 Chapter 7 Land and property issues 89 Annex A Scoping Document 107 Annex B Consultative Committee 109 Annex C Organisations Consulted 110 Annex D Data sources used in this report 113 1 Foreword In July 2020, the Chancellor asked the Office of Tax Simplification (OTS) to carry out a review of Capital Gains Tax, to ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent’.1 The review has attracted very strong engagement from advisers, businesses, academics and the general public, supported by an extensive range of meetings with interested parties with a wide variety of perspectives. Given the wide scope of the review, the OTS has produced two reports. The first report Simplifying by design was published in November 2020 and considered the policy design and principles underpinning the tax.2 This second report considers a range of key practical, technical and administrative issues, on the basis of the present policy design principles of Capital Gains Tax. The report covers a range of areas from moving home to getting divorced, running or investing in a business, or in relation to particular 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 OTS would like to thank Mark Pickard, who led the review, supported by Charlotte Alderman, Sally Campbell, Sarah Glover, Suzanne Green (kindly seconded to the OTS by PwC), Julia Neate and Hannah Smith, guided by OTS Head of Office David Halsey. We are also very grateful to our HM Treasury and HM Revenue & Customs colleagues, our Consultative Committee members and all those who have willingly given time, ideas, challenge and support. Kathryn Cearns – OTS Chair Bill Dodwell – OTS Tax Director 1 https://www.gov.uk/government/publications/chancellor-requests-ots-review-of-capital-gains-tax 2 OTS Capital Gains Tax Review: Simplifying by design. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/93 5073/Capital_Gains_Tax_stage_1_report_-_Nov_2020_-_web_copy.pdf 2 Executive summary Introduction The Office of Tax Simplification (OTS) is the independent adviser to government on simplifying the tax system. The work of the OTS is rooted in improving the experience of all who interact with the tax system. The OTS aims to improve the administrative processes, which is what people actually encounter in practice, as well as simplifying the rules. These are often of equal importance to taxpayers and HM Revenue & Customs (HMRC). In July 2020, the Chancellor asked the OTS to carry out a review of Capital Gains Tax (see Annex A), to ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent’. In its wide-ranging consultation, the OTS received valuable contributions from representative bodies, professional advisers, businesses, academics and from the Consultative Committee (see Annex B), through 54 consultation meetings, 180 formal written responses to the call for evidence and almost 1,200 members of the public contributing to an online survey. A list of organisations consulted, or which responded to the call for evidence, is in Annex C. Scope of the review Given the wide scope of the review, the OTS has produced two reports. The first report Simplifying by design was published in November 2020 and considered the policy design and principles underpinning the tax.1 This second report considers practical, technical and administrative issues, based on the present policy design principles of Capital Gains Tax. Given the nature of transactions to which Capital Gains Tax applies, the report also touches in some places on interconnections with other taxes such as Stamp Duty Land Tax and Inheritance Tax. The report does not cover partnerships, trusts, estates in administration, non-UK residence, non-UK domicile or complex international issues. While each of these can be a source of complexity, they are areas where the issues involved go much wider than Capital Gains Tax and could be the subject of a separate review. 1 OTS Capital Gains Tax Review: Simplifying by design. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/93 5073/Capital_Gains_Tax_stage_1_report_-_Nov_2020_-_web_copy.pdf 3 In keeping with the focus on individuals and smaller businesses, this review did not extend to issues specific to corporate groups, such as the substantial shareholding exemption, company reorganisations or demergers. Awareness A persistent theme running through many of the responses the OTS received to the Call for Evidence is that many people have limited awareness or understanding of Capital Gains Tax, of when it may arise, or of their reporting and paying obligations when it does. This means that it is particularly important for the technical and administrative rules, as well as HMRC’s guidance and processes, to be as intuitive as possible. It is equally important that the rules and guidance are updated where necessary so that they remain in tune with the way people live today rather than when Capital Gains Tax was introduced in 1965. Recommendations This report makes 14 recommendations (see page 14) across a wide range of areas covered in the body of the report, including moving home, getting divorced, and running or investing in a business. Here, in the executive summary, the recommendations are grouped by reference to the OTS strategic principles: • three recommendations that tackle difficult areas to make a difference over the longer term, • four standalone recommendations, • six additional recommendations affecting significant numbers of people There is then a broader guidance recommendation, highlighting eight specific areas where the OTS considers that HMRC guidance needs to be improved. Making a difference over the longer term The first three recommendations address issues where the OTS sees an opportunity for the government and HMRC to tackle difficult issues which will make a significant difference over the longer term. Personal Tax Account and Single Customer Account Over 19 million taxpayers have signed up for their Personal Tax Account,2 which will ultimately be replaced by the Single Customer Account. The OTS is encouraged that a Single Customer Account for all taxpayers that is easily accessible and secure is a key component of the government’s vision.3 2 Overview of HMRC's annual report and accounts 2018 to 2019. https://www.gov.uk/government/publications/hmrc-annual-report-and-accounts-2018-to- 2019/overview-of-hmrcs-annual-report-and-accounts-2018-to-2019 3 Building a trusted, modern tax administration system. https://www.gov.uk/government/publications/tax-administration-strategy/building-a-trusted-modern- tax-administration-system 4 As the OTS explored in its Reporting and Payment Review, an online digital platform is a modern way for a taxpayer to report income to HMRC and receive information about their tax affairs from the tax authority.4 However, it is not clear at what stage Capital Gains Tax will be included in this ambitious program. HMRC should integrate the different ways of reporting and paying Capital Gains Tax into the Single Customer Account, making it a central hub for reporting and storing Capital Gains Tax data (recommendation 1). There are three main ways of reporting a capital gain – through Self Assessment, the UK Property tax return, and the ‘real time’ Capital Gains Tax service. The OTS recommends changes to each of these but the overarching recommendation is that these should be brought together in the Single Customer Account. This could ease the administrative burden for all of the 500,000 or so people who file returns of disposals in any given year.5 This modern and fully integrated Single Customer Account would log relevant information for the taxpayer and act as a gateway to pay the tax in the most appropriate way. Agents should have access to the information in it, with the taxpayer’s approval. It would be a central hub to claim and keep track of Capital Gains Tax information, such as capital losses, main
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