Further recommendations from the OTS on making Capital Gains Tax (CGT) more understandable and “user friendly”.
Last month (May 2021) the OTS followed up their first report on CGT (November 2020) with a 2nd paper on “key practical, technical and administrative issues”. Coming in at 125 pages long this 2nd report is not short of analysis and looks at many aspects of CGT – including a couple of recommendations aimed at owners selling a residential property and former married couples who are now going through divorce and separation.
Let me look at these in turn:
Selling a property which is liable to CGT:
Latest figures from HMRC suggest over 150,000 taxpayers are reporting a sale of residential property each year but many are unsure about the extent of CGT on their sales. Of those taxpayers who reported a property sale only 85,000 actually incurred a CGT liability. So, it is clear there is a lot of confusion amongst both these taxpayers and their property agents!
Just to complicate matters further, from 6 April 2020 all taxpayers (including Trustees and Personal Representatives) selling residential property and believing they had incurred a CGT liability have just 30 days from completion of the sale to report the taxable gain and make the actual CGT payment.
That is a very tight deadline for many taxpayers and their advisors – it involves setting up digital accounts with HMRC and many elderly taxpayers can struggle with the technology to make their declarations and pay the tax.
In some cases, all the appropriate information may not be available to calculate the chargeable gain so “best estimates” must be used. This, in turn, means a further re-calculation will need to be submitted along with the taxpayers annual Self-Assessment Tax Return.
In view of all this unnecessary confusion the OTS are recommending the 30 day reporting deadline is extended to 60 days, which is a step in the right direction although we believe it should have been extended even further to 90 days.
Divorce And Separation
It is a long established principle for CGT purposes that couples who are married/in a civil partnership enjoy the ability to transfer assets between them on “ a no gain/no loss basis” – what this means in CGT terms is that for example, quoted shares which are standing at a capital gain can be transferred (gifted) to the spouse without triggering a CGT liability. This is often done to use annual CGT exemptions and other tax reliefs.
However, this all changes in the year of separation because current CGT rules only permit “no gain/no loss” transfers for the remainder of the tax year in which separation takes place.
So, if a couple decide to split up after Christmas (apparently this is not uncommon!) they have a very small “CGT window of 3 months” (up to the end of the current tax year on 5 April) to reach a financial settlement which may include transfer of assets which have an untaxed capital gain in their current valuation – i.e. this usually occurs with quoted and unquoted shares and sometimes holiday homes.
Essentially, a tax charge for separating at the wrong time in the tax year !
Quite sensibly the OTS propose that this “CGT window” be extended to the later of:
- The end of the tax year 2 years after the separation.
- Any reasonable time specified by the Court in terms of a transfer of assets (including such assets which have a current capital gain)
This approach makes a lot of sense, particularly when you factor in the time it takes for divorce proceedings and the related financial settlement to be agreed by both parties.
So, fingers crossed the above two recommendations make it into legislation soon and help many taxpayers get a better understanding of their CGT responsibilities without incurring unnecessary liabilities and potential penalties for late disclosure.
If you need help with either of these issues please do not hesitate to contact Langricks.