This week, the UK Government published its Command paper – ‘Tax Administration and Maintenance’, which builds on the Government’s 10-year tax administration strategy published back in July 2020.

For individuals and family business owners there was relief to be had from the fact the UK Government side stepped for now proposals put forward by the Office of Tax Simplification (OTS) in their two part review of Capital Gains Tax (CGT). The OTS is an independent advisor to the UK Government and is tasked with simplifying the UK tax system. In a two part review they undertook into CGT, which concluded in May 2021 they made various recommendations to simplify this tax. Notably they suggested the CGT free annual amount (currently £12,300) be reduced and that CGT rates be more closely aligned with income tax rates.

The CGT free annual exemption of £12,300 enables investors for example to realise gains within their non-ISA share portfolios of up to this amount without incurring CGT. Gains in excess of this are taxed at 10% or 20% depending on your marginal income tax rate. This rate increases to 18% and 28% if it is a disposal of residential property. The loss or a reduction in this annual exemption would certainly impact on individual investors and their investment managers and given the loss of any inflationary relief since 1998 when indexation allowance was abolished for individuals then implementing this recommendation would be a further blow. 

With CGT rates currently at up to 20% for all other assets, other than residential property (28%), a closer or indeed full alignment to income tax rates (i.e. up to 45%) would be very punitive, particularly in light of the reduced scope for higher earners to now contribute to their personal pension and receive tax relief. 

The UK government have said that they will implement for now only 5 technical recommendations (including increasing the period from one year to two years when no gains or losses arise on a transfer of assets between a couple on separation/divorce).

For now this is indeed welcome news and enables investors and their investment managers to plan rather than have to react to out of the blue Capital Gains Tax changes. Likewise for those family business owners considering an exit, this gives reassurance that the tax landscape for taxing, what is essentially their pension provision, will remain unchanged for now. With a UK General Election little more than two years away, changes to these rates and allowances could happen under a new Government, particularly if the COVID variants continue to wield their wrath.

For Inheritance Tax, again a reassurance that no change at this time, despite the previous recommendations made by the OTS on the design of this tax. Many potential tax raising recommendations were made in this Office of Tax Simplification report, to include the recommendation that the Capital Gains Tax free uplift on death of an asset only be given if the asset does not qualify for other Inheritance Tax reliefs such as Agricultural Property Relief and Business property relief. 

The other significant recommendation was the Office of Tax Simplification’s view that the level of non-investment (e.g. trading) activities needed in order for a business to qualify for the generous Inheritance Tax relief called Business Property Relief was to raise the level of non-investment activities needed from over 50% to over 80%. For those family businesses being run as mixed enterprises, with trading and investment activities then this raising of the bar would create a challenge for many of those businesses and indeed likely create Inheritance Tax exposure such that the family business could not be passed on intact on death. 

The review of Inheritance Tax has not gone away entirely though, it is  still likely to happen, it’s more a question of when. Reference was made by the Government to an All-Party Parliamentary review of the tax which occurred after the review undertaken by the Office of Tax Simplification. This later review called for an abolition of the tax and a complete reform to how we tax gifts passing in lifetime and on death, to include doing away with the generous Inheritance Tax Reliefs of Agricultural Property Relief and Business Property Relief. The upshot of this review, should those recommendations be implemented in future, is that those individuals particularly with less liquid assets would find it very difficult to pass assets on in lifetime or on death without a significant tax burden suffered.

For now it is business as usual on the Capital Gains Tax and Inheritance Tax front and a welcome calm for individuals and business owners who rely on these reliefs, given all the other storms around just now at present.

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If you would like to discuss this further, please do not hesitate to get in touch with myself, a member of our Private Client Tax team or your usual Johnston Carmichael adviser.