In my first post on here it seems very apt to pick up the topic of the Governments recent request for the Office of Tax Simplification (OTS) to review the Capital Gains Tax and the potential impact on Property Investors and small businesses. I’ve conducted a short review from the perspective of how this impact will myself and similar investors. Capital Gains Tax is notoriously complex and apparently raised its highest amount ever at estimates of £9Bn last year. Following is an overview and my thoughts on actions we can take.
The review released last week is a substantial report of some 135 pages, with a multitude of tiered options, relating to these core areas;
· Rates and boundaries,
· Annual Exempt Amount,
· Capital transfers and
· Business reliefs
· “As well as looking at opportunities to simplify administration and the impact of technical issues, the review will explore areas where the present rules can distort behaviour or do not meet their policy intent, to help ensure the system is fit for purpose.”
In one aspect it is a commendable effort from the people involved to have compiled the document, covering such a range of options and open brief, in a relatively short timeframe since the consultation ended. However as a systems engineer I struggle to comprehend a review only looking at this area of tax. In reality if looking to simplify and remove ’tax distortions’, then the review should be looking at the whole Tax system. Otherwise I just see these changes introducing their own distortions. Linking back to the initial government request, it is too wide and lacking specific examples of the problem to enable an adequate solution to be defined.
The meta data in the summary above says quite simply to me, the government is looking for a more subtle option of clawing back money spent on corvid. The Office for Budget Responsibility say direct policy costs will be £192.3 billion for the current financial year alone (April 2020 to April 2021). Simplification almost always means reducing categories but at the same time catching more in the new categories and for more. Capital gains is potentially an easy political target as it is levied against gains when an asset is sold.
What I would like to see is tax that is geared to provide the income the government requires to suitably run the country and stimulate innovate that which creates new wealth. We require new wealth creation to progress, not asset grabs. When the government talks of tax distortions I wholly agree. Yet probably in a different way to them. It seems that every year there is a creeping tweak of one area to pull in as much revenue as possible, from those who can’t avoid it, without a real grasp of what income we require long term. Maybe I am missing this approach inside Whitehall? A country is a business and it should be operated like one. That is we invest in creating new revenue streams and maximising what we have. The tax changes in this document don’t align with that. It seems an easy asset grab from those that cant now avoid it.
Report Summary
In general the recommendations are options for selection by the government. The previous Inheritance Tax review has yet to have anything implement. Depending on which suite of options they do select will significantly change the impact on investors. So it is not really possible to go into significant detail on options. Other than noting there is a lack really justification on how they work. There is a technical paper due in the new year that we have to expect will cover this. I see it hard to argue a real lasting solution other than raise more tax income from a more politically palatable area. As the problem to solve is not clearly defined.
The items that standout are and will impact many of us property investors (particularly those buy-to-let investors from the early 2000s that have large portfolios in their own name)
· Reduce CGT bands and Align with income tax
· Lower CGT allowance threshold to nearer £4K
· Abolish investors relief
· Aligning business sale relief with pensionable age only
· CGT on inherited assets and how works with Inheritance tax
· Simplifications to administering the CGT system – next report
I would like to see the actual consultation data as it does seem reading the report the views used seem to largely align with the desire for changes that suit the government. From a 1000 responses and 22 consultations to be quoting one response or several (which happens a lot) that agrees to a proposal feels very much like grabbing at straws to give to justification… I would want to see high percentages of agreement or dissatisfaction current functions to guide the new concepts.
When we talk of distortion, foreign investment in UK property has a very clear effect of distorting the prices beyond those affordable to local inhabitants. I would certainly like to see tax system that reduces the attractiveness or limits the number of sales.
Government action
a) Do nothing – unlikely
b) Do minimum – take a single or couple of easy wins - align capital gains with income tax bands &/or reduce the current allowance to circa £4,000 per year.
c) Do Something – Anyone’s guess I’m afraid
Next Steps
If we take a 60,000 feet view there are some significant conclusions we can draw and hence actions we can take right now to potentially influence the decision the government will make.
Business wise
· Consider long term plans for investment property held personally – it may well be worth selling or transferrin to a ltd company ahead of the stamp duty holiday ending, and any capital gain measures coming in.
· Do not buy further investment property in your personal name – that game is truly over
· Review plans for business transfer and exit strategies.
Political
· Write to your local MP and make your views known on potential changes. Request that the government review changes to tax to corporations and look at the tax system as a whole. Make your individual views known. Ask how they are going to stimulate investment and innovation to create new wealth not just conduct asset grabs to fund corvid
· Write or speak to your local rep at the National Regional Landlord Association and ask what dialogue they are having with government about the potential changes
· Generally make noise of disapproval
Welcome your thoughts and I do hope those reading will make noise to their local MP…