It is difficult to assess how removal of the capital gains tax (CGT) uplift on death might affect taxpayers’ behavior, and the impact of any such change must be carefully considered, tax professionals said.
Broadly, a deceased person’s assets are not deemed to have been disposed of on the death but are deemed to be acquired by the personal representatives at their market value for CGT purposes. The assets may, however, be subject to inheritance tax.
The Office of Tax Simplification (OTS) had issued a call for evidence to inform its review of CGT. The Chartered Institute of Taxation began its November 9 response by reiterating concerns about the implications — including increased complexity — of departing from the current re-basing on death.
In an August 12 letter to the OTS, John Bunker, chair of the CIOT’s private client (U.K.) committee, had outlined three “high-level areas of concern” and said committee members were “puzzled at how the line of enquiry fits into the OTS’s statutory remit of simplification when it appears to move into areas of tax policy.”
The Institute of Chartered Accountants in England and Wales had expressed concern that the scope of the OTS review, commissioned by Chancellor of the Exchequer Rishi Sunak, extended “beyond simplification, into policy areas that are outside of the remit of the OTS and are the preserve of government and parliament.”
Bunker’s letter suggested that any fundamental changes to the scope of CGT should be the subject of “blue skies” consultation. “We wonder how a central line of enquiry into extending CGT to the taxation of gains on death fits within the OTS’s function set out in Finance Act 2016 section 185(1), that it is to ‘provide advice to the chancellor on the simplification of the tax system,’” he wrote.
The impact of any change to CGT on the interaction with income tax and inheritance tax would need to be fully considered, and the potential for unintended consequences minimized, Bunker said, adding that “it is not clear” that those issues would be within the scope of the review.
Sunak had told the OTS that he would be interested in “any proposals . . . on the regime of allowances, exemptions, reliefs, and the treatment of losses within CGT, and the interactions of how gains are taxed compared to other types of income.” It is “a reasonably business-as-usual practice” for HM Treasury to ask the OTS to examine parts of the tax system to ensure that they are up to date, he told the House of Commons Treasury Committee in July.
The OTS’s call for evidence asked readers to consider to what extent the absence of a CGT charge on death, together with the market value rule, “distort and complicate the decision-making process around passing on assets to the next generation.”
“The current approach whereby an asset is rebased to its market value on death has the merit of simplicity in both concept and administration,” Bunker argued.
The CIOT’s November 9 submission addressed several issues, including the possibility that a general CGT holdover relief for gifts might be considered as a quid pro quo for removing the uplift on death. A “no gain, no loss holdover” on death would mean that a decision to make gifts during life or on death was “CGT neutral.” Some people might be encouraged to make lifetime gifts, the CIOT suggested. “Others, however, would still retain assets until their death, either to provide financial security in their own mature years or not wishing to risk the next generation dissipating their assets through divorce or insolvency,” it said.
Tax After Coronavirus
Effective CGT reform would improve fairness and simplicity as well as raising more money to tackle the deficit, the Association of Accounting Technicians said in written evidence to the House of Commons Treasury Committee’s inquiry into tax after coronavirus.
Business asset disposal relief (formerly entrepreneurs' relief), the chattels exemption, and gift relief “should all be scrapped,” the association said.
But Deloitte told the committee that the tax system should “continue to reward entrepreneurial risk.” While the function of the relief has been criticized, taxing entrepreneurs in the same way as employees “may stifle growth and investment,” the firm argued.
“It will be particularly important to make the U.K. an attractive location for entrepreneurial business after COVID-19 and Brexit, building on the U.K.’s existing success in certain start-up industries such as financial technology,” Deloitte added. (Prior coverage of the coronavirus pandemic's effect in the United Kingdom. Related coverage of Brexit.)