07 Dec 2020

OTS and the Plastic Population: The Only Way is Up (for CGT)?

What’s happening?

There has been much attention on the Office of Tax Simplification’s policy paper on capital gains tax. In some ways it is a case of it matters more the way something is said than what is actually said. The action point is that individuals and families should be reviewing legal structures and succession planning ahead of potential change.

The OTS strikes a different tone from its other papers. Readers of the OTS’ papers on inheritance tax should quickly notice the difference. The inheritance tax work was shrouded in reminders about the OTS’ role in considering matters of simplification and streamlining rather than wider policy matters. Policy was for government. The capital gains tax paper strides (with some apparent swagger) into the policy arena. The OTS recommendations cover not just technical matters about how the tax works, but the policy that underpins what activity is being taxed, how any relief works and the (policy) principles for the rate of the tax.

Rather than take the time here to dissect the paper, let’s jump to what steps might be taken in light of the report and the direction of travel apparent form the politics and the macro-economic situation. A direction of travel that looks unaltered by the recent Spending Review. Indeed, as we have discussed before in the context of the likelihood of inheritance tax changes, the recipe for change historically is (1) the tax is too complicated; (2) the tax is not ‘fair’; and (3) the macro-economic situation creating a political momentum for change. The latter factor being the determining factor underpinning change.

“Hold on… (hold on)…. won’t be long”

That’s what Yazz sang in a classic up-tempo and uplifting tune (the younger reader might know it from the titles of TOWIE). So, if it seems that “the only way is up” for capital gains tax and it “won’t be long” (maybe?), should we “hold on” or take action ahead of potential rule changes.

Well, what an individual, family, business or trust can do will depend on their own circumstances. Some will have the opportunity or appetite to consider steps in the near future.

An appetite including to put in place steps to ‘lock in’ current rates of both ‘normal’ capital gains tax and Business Asset Disposal Relief (aka Entrepreneurs’ Relief). These will be steps that require a blend of tax and legal strategies and actions to implement. This could involve a restructure of a business to mitigate the effects of potential change.

Beyond taking a position on and planning for possible short term gains tax changes, any restructure of business or family wealth needs to take account of other factors such as whether or not inheritance tax outcomes can maximized, the robustness of structures to protect family wealth, the control, management and operations of any business, the desirability of cash extraction and the overall succession plan. As the OTS notes, the current rules “distort behaviour” (do they really?) and in reacting to the spectre of change one must avoid creating a situation that itself distorts sensible estate and business planning.

Some certainties about capital gains tax…

Capital gains tax is not paid by many people (only 265,000). In the scheme of government finances, it brings in nothing. It will never (status quo or even big change) contribute much to paying down the pandemic bill. These are certainties.

But it can have a nice political ring to it (whether going ‘up’ or ‘down’). It will be the politics that matter and even if gains tax will really add nothing to the central coffers, if you are in line to pay it (as one of the 265,000), you will really feel that the only was indeed up. You will want to know what might be done to salve the effects of possible change.

For help and advice on succession planning and related issues get in touch with Alan Eccles: alaneccles@bkf.co.uk / 07470808717.