September 2021 – The OTS Second Report on Capital Gains Tax – Simpler, But not yet Simples

Author: Mitchells Roberton
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  • Believe it or not there is something called the Office of Tax Simplification (“the OTS”). It was set up in 2010 and no doubt they try their best but one might think they have not made much headway so far. One does not know what Orlov the meerkat of “simples” fame would make of the UK tax system but one doubts “simples” would be his verdict.
  • In July 2020, the Chancellor asked the 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”.
  • The OTS’ first report was published in November 2020 and considered the policy design and principles underpinning the tax.
  • Their second report was published earlier this year and considered practical, technical and administrative issues. It made fourteen recommendations across various areas including moving home, getting divorced, and running or investing in a business. This note focuses on a few of those recommendations.

The current rules on reporting and paying any Capital Gains Tax due

In outline:

If you sold residential property in the UK on or after 6 April 2020

  • You must report and pay any tax due on UK residential property using a “Capital Gains Tax on UK property account” within 30 days of selling it. You’ll need a Government Gateway user ID and password to set your account up or sign in. If you do not have a user ID, you can create one the first time you sign in.

If you have other capital gains to report

  • If your gain is not from residential property sold in the UK since 6 April 2020, you have a choice of how and when to report the tax.
  • You can use the “real time” Capital Gains Tax service immediately if you know what you owe. You need to report your gain by 31 December in the tax year after you made the gain. You’ll need a Government Gateway user ID and password. If you do not have a user ID, you can create one when you report and pay.
  • Or, you can report your gains in a Self Assessment tax return in the tax year following the tax year in which you disposed of assets. But you should not wait until the next tax year to report gains on UK residential property sold since 6 April 2020. You may have to pay interest and a penalty if you do.

The OTS recommendations on reporting and paying tax due

  • The OTS made various recommendations about streamlining the processes. But, in particular, the Report said:

“the requirement to report taxable gains on a UK residential property disposal within 30 days is a very ambitious target for many taxpayers … This concern was also reflected in the overwhelmingly negative response that this policy [has] received … Many taxpayers only find out about their obligations after they have sold their property … The government should consider extending the reporting and payment deadline for the UK Property tax return to 60 days, or mandate estate agents or conveyancers to distribute HMRC provided information to clients about these requirements.”

  • Let’s hope that recommendation is followed through: 30 days is much too short.

The current rules on Private Residence Relief and garden developments

  • If a homeowner sells their garden to a developer the homeowner can usually get full Private Residence Relief on any gain on sale.
  • On the other hand, if a homeowner chooses to split their garden and build a new home for themselves on the part split off they may not get full Private Residence Relief on their new home in relation to the period before the new house was built.

The OTS recommendation on Private Residence Relief and garden developments

  • The OTS recommends that the government should adjust Private Residence Relief to cover developments in a taxpayer’s garden which the taxpayer subsequently occupies. This would make self-builds which are not uncommon more tax-neutral.

The current rules on divorce and separation

  • Spouses or civil partners can transfer assets between themselves without triggering a CGT charge. Instead, the transferee gets the asset at the transferor’s “base cost” for CGT. This is CGT neutral and is often referred to as a “no gain/no loss” transfer.
  • If the couple decide to separate permanently, they are still able to pass assets between themselves without triggering a CGT charge but only if the transfer is made in the same tax year as the separation. This produces arbitrary results depending on when in a tax year the couple actually separate.

The OTS recommendations on the rules for divorce and separation

  • The OTS recommends expanding the period for such “no gain/no loss” transfers to the later of: (1) the end of the tax year at least two years after separation; or (2) any reasonable time set for the transfer of assets in accordance with a court-approved financial agreement.
  • As the OTS says: “It is unrealistic to expect separating couples to have resolved their affairs by the end of the tax year of their separation.”

 

Note: This material is for information purposes only and does not constitute any form of advice or recommendation by us. You should not rely upon it in making any decisions or taking or refraining from taking any action. If you would like us to advise you on any of the matters covered in this material, please contact Lauren Booth: email Lauren@mitchells-roberton.co.uk

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