There's Nothing Simple About Tax

The Office of Tax Simplification (OTS) has published a letter it has received from the Financial Secretary to the Treasury on behalf of the Chancellor Rishi Sunak which thanks them for their work but rejects most of the recommendations in their recent reports on Inheritance Tax (IHT) and Capital Gains Tax (CGT).

A review of IHT was commissioned by the then Chancellor Philip Hammond in 2018. Two reports were produced by the OTS. The first in 2018 covering the administration of IHT and the second in July 2019 on how to simplify the technical design of IHT. The OTS outlined 11 recommendations for consideration, including a simplification of lifetime gift exemptions and a change in the scope of reliefs such as those for business and agricultural property.

In the letter to the OTS it has been confirmed that all 11 recommendations regarding IHT have been rejected. ‘After careful consideration of your recommendations, the Government has decided not to proceed with any changes at the moment but will bear your very valuable work in mind if the Government considers reform of IHT in the future.’

It seems that when it comes down to it the Government, although apparently in favour of simplifying taxes, aren’t prepared to jeopardise the £6 billion and rising contribution of IHT to the public finances.  

There is at least more positive news regarding CGT where the Government has accepted five of the recommendations from the second OTS report on technical and administrative issues. One of these recommendations has already been announced in the Autumn Budget, namely that the time limit for reporting and payment of CGT on disposals of UK residential property has been extended from 30 to 60 days from the date of completion. This still doesn’t allow much time to make the necessary return following a property sale but is a considerable improvement on the previous position!

Perhaps the most welcome recommendation that has been accepted concerns the capital gains position on separation and divorce. Transfers of assets between spouses or civil partners are treated as made on a ‘no gain no loss’ basis when they are living together. However, once a couple separate that ‘no gain no loss’ treatment only continues for the remainder of the tax year of separation. Any subsequent transfers are deemed to be made at market value which can create significant CGT liabilities often when there is no actual sale of an asset. The Government has agreed that the ‘no gain no loss’ window on separation and divorce should be extended and intends to consult on the details over the course of the next year.   

It is disappointing that so few of the OTS recommendations have been taken up. Everyone wants tax simplification, but it seems to be very difficult to achieve.