More time to pay, and a simpler reporting regime are among sweeping changes to capital gains tax review proposed by government tax experts.
The Office for Tax Simplification (OTS) says too few people report a CGT liability or pay on time because they have a limited understanding of how the tax works.
The report covers 14 recommendations aimed at streamlining CGT and clearing up some ambiguities in the law.
These include some confusion over Private Residence Relief (PPR) when splitting homes with large gardens and when a couple divorce or separate.
What is Capital Gains Tax?
Capital Gains Tax (CGT) is the second major tax behind income tax that landlords must factor into their finances.
CGT is worked out on the profits, or gain, in property value when disposing of a buy to let, house in multiple occupation (HMO) or second home.
Around £8.3 billion a year is paid in CGT by 265,000 people, compared to 31.2 million paying £180 billion in income tax and the £132 billion raised by VAT.
Why is CGT under review?
In July 2020, Chancellor Rishi Sunak asked the OTS to look at how CGT works and to offer recommendations for any improvements.
The Treasury repeatedly asks the OTS to review taxes, and the CGT review is seen as part of that process.
Part of the request was to look at taxpayer behaviour towards CGT and if the current rules were fit for purpose.
What are the OTS CGT recommendations?
The OTS clearly sets out a CGT reform agenda for the government to follow.
The report contains 14 recommendations split into three categories:
Reporting CGT to HM Revenue & Customs
Taxpayers have three alternative ways of reporting they may have CGT to pay:
· Submitting a UK Property Tax Return
· With HMRC’s Online CGT Service with a Government Gateway ID
The OTS wants HMRC to integrate these three services under the Making Tax Digital project to make a one-stop shop for reporting and managing CGT.
OTS Tax Director Bill Dodwell said: “Integrating Capital Gains Tax into the Single Customer Account is a natural ambition for this vital HMRC programme and would reduce the need for people to fill in a full Self-Assessment return just because they need to report a capital gain.”
CGT time limits too short
The OTS estimates 85,000 people a year must report and pay a CGT bill within 30 days of completing the sale or transfer of a home, and around a third fail to hit the deadline and have built up £1.1 million in fines.
The report says not enough taxpayers are aware of the CGT rules and that even professionals have problems with meeting the 30-day deadline.
The recommendation is the time limit should be extended another 30 days to give a 60-day deadline.
As most of the CGT property transactions involve buy to let or second homes, the OTS also recommends the government should channel more information about reporting CGT through letting agents.
Unlocking private residence relief (PPR)
How private residence relief works for landlords is sometimes confusing and complicated to work out.
The relief reduces or exempts taxable CGT gains for homeowners, but a little-known relief that allows owners with second homes to nominate a main home is rarely triggered.
The relief takes one of the homes outside the scope of CGT.
The OTS says taxpayers have ‘little awareness’ of the nomination procedure that could save tax for up to 1.4 million people with second homes. The report also draws attention to an anomaly that calls for second homeowners to nominate a main home even when a sale results in no CGT liability.
Another issue with PPR is homeowners can sell part of their garden to a developer and usually claim full PPR relief, but if they split the land and build a new home on the land to move into, they are unlikely to receive full PPR relief.
Tax reprieve for troubled couples
Divorcing or separating couples qualify for the same tax reliefs as married couples during the year they divorce or separate, but need more time to sort out their finances.
The OTS report reveals in 2020, couples took an average 12 months to part.
The current relief lets them benefit from the same no gain/no loss tax rules as couples for 12 months and then reverts to standard CGT rules.
Dowell said: “In 2020 it took an average of a year to secure a divorce in England and Wales. Everyone who commented on this issue considered that limiting the tax rule over these transfers to the tax year of separation give couples inadequate time to reorder their affairs.”
The recommendation is to extend the deadline to the end of the tax year at least two years after divorce or separation.
CGT review outcome
Political ideology is at the bottom of the OTS CGT review.
The OTS argues that income and gains should face similar taxes, which means landlords would pay more CGT as the rates are lower.
Landlords and second homeowners pay CGT at 18% (basic rate) and 28% (higher rate) compared with 20% (basic) and 40% (higher) for income tax.
These distorted rates encourage taxpayers to declare property profits as gains rather than income, says the OTS, and if the government wants to resolve this distortion, CGT rates need to align closer with income tax rates.
The dilemma is hiking tax rates may lead to owners hanging on to property to leave in their wills to avoid paying high tax bills on homes that have soared in value over many years. This wipes out gains for beneficiaries and allows them to sell without paying CGT.
The outcome will remain unknown until the government decides to review CGT rules, for which there is no current deadline.