It is two years since the OTS put forward its proposals for reform of inheritance tax (IHT), when it made 11 recommendations, including simplification of lifetime gift exemptions and changing the scope of reliefs such as those for business property and agricultural property.
Following the high costs of supporting the economy during the pandemic, the annual £6bn plus income from inheritance tax is an important source of revenue and the freezing of thresholds and bands until 2025-26 means that the Treasury does not want to make any rule changes at this time.
A letter from the financial secretary to the Treasury, Lucy Frazer, states: ‘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’.
The OTS also conducted a detailed review of capital gains tax, making a number of recommendations on how the tax could be reformed, including aligning rates with income tax.
The government has accepted some of the OTS recommendations on reform, but stressed that any changes must be considered in the context of the impact of tax changes on wider tax policy.
‘These reforms would involve a number of wider policy trade-offs and so careful thought must be given to the impact that they would have on taxpayers, as well as any additional administrative burden on HMRC. The government will continue to keep the tax system under constant review to ensure it is simple and efficient,’ Frazer said.
‘The government has accepted five recommendations from the second report on the technical and administrative issues with CGT, which we agree will offer some practical simplifications for taxpayers. I have also asked officials to consider the details of five more of the recommendations that you have set out and to keep these issues under review.’
Proposals for HMRC to integrate the different ways of reporting and paying capital gains tax into the Single Customer Account, making it a central hub for reporting and storing capital gains tax data have been accepted and this will be implemented into future development.
In the Budget last month, it extended the payment deadline from 30 to 60 days for making a capital gains tax return and payments on account when disposing of UK land and property.
However, the government rejected plans to change the rules on the use of private residence relief when a home owner builds a property in their garden.
In its response, the government stated that it had ‘considered the application of private residence relief (PRR) and is satisfied with the current rules. These provide consistency for individuals who construct a new residence for themselves which later becomes their main home, regardless of whether that residence is in the garden of an existing home or on land elsewhere’.
There will be a consultation on the ‘no gain no loss’ window on separation and divorce to extend the current time period and will consult on the detail over the course of the next year. The OTS has suggested that the government should extend the ‘no gain no loss’ window on separation to the later of: i) the end of the tax year at least two years after the separation event; or (ii) any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a court or equivalent processes in Scotland.
There will also be an expansion of rollover relief which apply where land and buildings are acquired under Compulsory Purchase Orders (CPO) to cover reinvestment in the form of enhancing land already owned, with plans for a consultation ‘in due course’.
The government also accepted that the enterprise investment scheme rules need to be revisited, with a view to ensuring that procedural or administrative issues do not prevent their practical operation. This will be considered as ‘the government recognises that a review of these schemes is advantageous. Whilst the government will consider this recommendation further, it will do so in the context of the income and CGT functions of the relief’.
Another recommendation which was accepted relates to the quality of written guidance on the complex rules and HMRC is currently working on updating guidance to provide more accessible guidance, for example on the UK property tax return. Other guidance under review includes the rules on business asset disposal relief and when it could apply to farmers or others looking to retire over a period of time; enterprise investment schemes; land assembly arrangements; and flat management companies.
John Barnett, chair of CIOT’s technical policy and oversight committee, said: ‘Everyone says they support tax simplification but the government’s responses show how difficult it is to achieve.
‘The OTS has had some success with limited tweaks, such as on the CGT rules around divorce, and on earlier proposals to reduce IHT paperwork, but the OTS’s efforts to come up with broader ideas for change, on both CGT and IHT, have been rejected.
‘Bluntly, the challenge the OTS faces is that, while ministers buy in to the principle of simplification, whenever it comes up against political or revenue obstacles they trump it. If a significant reform costs the Exchequer money the government reject it. If a significant reform doesn’t cost the Exchequer money it normally produces losers who will make a fuss so it gets rejected then as well.’
With the OTS having spent years working on the proposals, which included simplifying many complex taxes, the government has missed a crucial opportunity to make some much needed and necessary reforms.
Katharine Arthur, partner and head of private client at Haysmacintyre, said: ‘For some, the government’s highly anticipated response to the OTS’ recommendations for capital gains tax and inheritance tax will have come as a disappointment. There are many complex aspects to these taxes which would benefit from being simplified, and in rejecting them the government has missed an opportunity to streamline the overall process.
‘However, in the current context, changes to capital gains tax and inheritance tax are not amongst the Treasury’s highest priorities; and in the interest of avoiding significant policy changes it is understandable that HMRC has taken a hands-off approach in this respect.’
