The widely publicised proposal by the Office of Tax Simplification (OTS) to 'align' rates of CGT with income tax was not unexpected.

Many have taken this to mean that an increase in CGT is on the horizon, perhaps in part to try and balance the books following the impact of COVID-19. This may well be the case. Only time will tell, but the speed with which the OTS have carried out the review and also published this first stage report (following the Chancellor’s request, which was only made in July) suggests that any change will probably happen sooner rather than later.

Having had the opportunity to review the OTS recommendations in more detail, a number of other interesting points arise:

  1. The recommendations go further than the mere alignment of tax rates; 'boundary issues' between CGT and income tax come under particular focus;
  2. In particular, one recommendation is that employees’ and owner-managers’ rewards from personal labour (as distinct from capital investment) ought to be treated consistently, as between CGT and income tax;
  3. Furthermore, the OTS recommends that the government consider taxing more share-based rewards from employment at income tax rates rather than CGT rates;
  4. Importantly, that same principle might also be applied to accumulated retained earnings in smaller owner-managed companies (i.e. income tax rates might be applied when such retained earnings are realised, either through a company sale or liquidation);
  5. Finally, the OTS recommends that Business Asset Disposal Relief (the relatively recent replacement for Entrepreneurs’ Relief) ought to be replaced with a tax relief more focused on retirement, and that Investors’ Relief should be abolished altogether.

In short, even if there is not going to be an alignment of CGT and income tax rates as many have predicted, the OTS recommend instead that a number of those important 'boundary issues' are dealt with. In practice this would of course mean that the income tax net is effectively cast much wider than it is at present, to capture what has until now benefited from CGT treatment.

For now, taxpayers and adviser will await the second OTS report with interest.

If you wish to discuss the issues raised in this article further, please contact Mark Whiteside at 0151 600 3269 or mark.whiteside@brabners.com