Changes to Capital Gains Tax (CGT) proposed by the Office of Tax Simplification (OTS) have been welcomed by advisers for the extra time they may give clients.
Earlier this week the OTS published its second report into CGT after being requested by Chancellor Rishi Sunak to review the controversial law in 2020.
Fourteen recommendations have been made by the OTS which has highlighted low levels of public awareness when it comes to this tax.
Capital Gains Tax is one of those taxes that everyone has heard of but knows very little about."
A key point is the proposed change for the 150,000 individuals every year who dispose of UK residential properties. Over 85,000 of these have a taxable gain and will need to file a UK property tax return within 30 days. The OTS is now recommending extending this to 60 days or mandating estate agents and conveyancers to distribute HMRC information about this requirement.
This has been welcomed by advisers who would be given more time to assist with financial planning.
"For many taxpayers, getting all of the required paperwork ready within 30 days, as well as the cash on hand to pay the tax bill, is just too ambitious," says Holland Hahn & Wills partner Amyr Rocha Lima. "As a result, extending the deadline for paying any CGT on a property sale would give homeowners some breathing room to ensure that they have the funds necessary to cover the tax and make any reinvestment arrangements."
More time to organise clients' tax matters may be welcomed by advisers, but they will still face an educational hurdle to surpass.
One of the OTS's recommendations, proposed to simplify how this tax is paid, is to integrate CGT into a single customer account to ease the administrative burden for the 500,000 people who pay this a year. Lyndhurst Financial Management financial adviser James Wyman recognises the need to simplify this but is still concerned about clients' general lack of understanding.
"Capital Gains Tax is one of those taxes that everyone has heard of but knows very little about," he says. "The online portal for submitting property gains works very well although there have been issues with older, computer illiterate clients. Having a single point to report all CGT would make life a lot simpler. Although there is still the need to educate the public on the fact that they must be proactive and report the gains to HMRC as I fear many would still be caught out by this."
One of the OTS's recommendations that has been most welcomed is how it proposes divorcing couples' CGT is treated. Currently, divorcing or separating couples can continue to benefit from transferring assets to one another (without triggering CGT liabilities) in the tax year in which they separate. The OTS is recommending extending the operation of this rule to the end of the tax year at least two years after the separation.
"Divorce is a difficult time and it's unhelpful that the current CGT regime can create further stress with having to complete transfers of assets before a tax year-end deadline," said RBC Wealth Management head of wealth planning Dean Moore. "An extension of this period to two years would enable parting couples to achieve a more orderly distribution of assets without the additional pressure of having to meet a deadline, which could be just a few days, as the tax year-end approaches."
Quilter Chartered financial planner Rosie Hooper describes this development as ‘encouraging' for families going through such difficult periods: "It is important that divorcing couples have the time and space to process what is a significant and difficult period in their lives. Extending the ‘no gain no loss' window to the end of the tax year two years after the separation is a positive step and should prevent CGT difficulties cropping up unexpectedly."
This has also been welcomed by LEBC Group director of public policy Kay Ingram, but she warns that advisers would still have to contend with the upcoming "no fault" divorce law for separating clients. A no-fault divorce is a divorce procedure that does not apportion blame to either party. Due this autumn, the law will change the timings of divorces and therefore impact the window for tax planning.
"Few divorcees are aware of the loss of tax exemptions, legal right to inheritance and pension benefits which becoming divorced entails and CGT is only one of these and unexpected tax bills are unwelcome, so more time will be helpful," says Ingram.
"However, from the autumn, divorces will be sped up to a six-month timeframe when the new 'no fault' divorce becomes law. This means that couples will need to plan the financial split ahead of the legal process or risk losing exemptions from CGT, IHT and pension rights. Once divorced the exemption will no longer apply, notwithstanding any extension which arises from the OTS proposals."
All these recommendations are moot if the government decides to disregard the OTS's findings. Previously, the Chancellor has chosen not to act on earlier recommendations by the office to raise the rate of CGT. The political argument for addressing this reform has only become louder though, as Philip James Financial Services IFA Philip Hanley explains.
"It seems the sort of soft target any Chancellor would like, not understood by or paid by that many voters, especially those behind the Red Wall," says Hanley. "If you're a conspiracy theorist, I guess you could point to richer vested interests whom it would affect. I'd say continue to watch this space."