Capital Gains Tax Review: We’re Just Going Round In Circles

Following the publication of the Office of Tax Simplification’s (OTS) report into Capital Gains Tax (CGT) on 11 November 2020, which called for income and capital gains tax rates to be more closely aligned, Nigel May, partner at MHA MacIntyre Hudson says if we must reform CGT we could do worse than to restore some elements of Tony Blair/Gordon Brown’s system:

“It is a laudable aim to make the tax system simpler but it is not always a success and Capital Gains Tax exemplifies this problem well. One of the OTS’s recommendations is to align the income and capital gain tax rates in the cause of simplification, however we have been here before. Ironically, the current differential between income and capital gains tax rates was itself the product of a previous attempt by Alistair Darling to simplify the system in 2008.

Darling’s reforms, carried out in the name of simplification, created the current rates of CGT, with gains above the basic rate threshold taxed at 20%, or 28% for residential property, creating a disparity between tax levels for income (40% or 45% for higher rate payers) and capital gains. Previously, the system worked on lines set down by Nigel Lawson in 1988, who removed a flat rate of 30% for capital gains and aligned income and capital gains rates. It feels now like we have come back full circle with demands to return to the old pre-Darling model.

“If we do have to circle back to a new system though, we could do worse than to reinstate some aspects of Gordon Brown’s taper relief system introduced when he was Chancellor of Tony Blair’s government in 1998. Under this system relief on capital gains tax increased based upon the period of ownership, which meant you paid less tax the longer you owned an asset. What we should definitely avoid is returning to the pre-taper system of retirement relief which allowed individuals over-50 making capital gains on certain asset classes to pay a lower rate of CGT (which was in place until 1998). In an environment of non-discrimination, we shouldn’t be creating additional tax differentiation based upon age.”