Disappointment that major capital gains tax report neglects unrepresented taxpayers
LITRG is disappointed that the Office of Tax Simplification's (OTS) 135-page review of the capital gains tax (CGT) regime and its recommendations fail to acknowledge fully how CGT affects unrepresented taxpayers – in particular, the role of the Annual Exempt Amount (AEA) in preventing inadvertent non-compliance by those unaware that they might have a CGT liability.
Taxpayers who have chargeable gains falling within their AEA (£12,300 for 2020/21) do not have to pay any CGT and generally are not required to register to file a Self Assessment tax return if they do not already file one. This means that unrepresented taxpayers who make a chargeable disposal without realising it – most often on the disposal of a property which has at some point been the taxpayer’s only or main residence – are protected from falling foul of compliance obligations where the amount of the chargeable gain is small.
While the OTS report does not recommend that the Government should reduce the AEA without first considering what its purpose should be – LITRG is concerned that any reduction will bring more unrepresented taxpayers into scope of the CGT regime. HMRC data, for example, suggests that a reduction of the AEA to £2,000 would bring more than 250,000 taxpayers into the Self Assessment regime.
Victoria Todd, Head of LITRG, said:
“The OTS say that if the AEA is to be reduced, other exemptions should be reviewed – but it does not consider the case where an individual disposes of a property which has not been their only or main residence throughout the entire period of ownership. This is concerning, given that recent changes to private residence relief, such as the reduction of the final period of ownership which qualifies automatically for relief, relied on the fact that the AEA at its current level would give unrepresented taxpayers some protection from accidental non-reporting.
“We see that the rules on disposing of a property which might not have always been the taxpayer’s main home are not well understood among unrepresented taxpayers. In our experience, people often erroneously believe that if you sell a property which was at one point your home, then the disposal will be fully exempt. Making such a mistake might expose taxpayers to penalties and interest for failing to declare the disposal when they should have done.
“The AEA is crucial in preventing unrepresented taxpayers falling into this trap – and its level is a sensible one in the context of selling property. We would urge the Government not to reduce it – or otherwise fully consider how they might mitigate the issues for unrepresented taxpayers which would be created.”
Notes for editors
1. The OTS Capital Gains Tax Review: Simplifying by design can be found on this link. It was published yesterday (11 November 2020).
2. Low Incomes Tax Reform Group
The LITRG is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998, LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. The CIOT’s 19,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.