Capital Gains: if you’re moving home, getting divorced…
Most of us move home many times during our lives and, sadly, quite a lot of us get divorced. Given the stress involved in either event, it’s unsurprising that tax and capital gains (CGT) are not at the forefront of our minds when we’re in the midst of packing up or considering custody of the kids.
However, once you dig down (or your solicitor brings it to your attention), in these circumstances capital gains are an issue that you may need to act upon.
To that end, we’re glad to report that a new report from the Office of Tax Simplification (OTS) suggests an overhaul of CGT rules around tax liability when moving home or getting divorced, as well as an extension of the 30-day deadline for settling CGT bills when selling property.
To put this in context, in the 2017-18 tax year, some 265,000 individual UK taxpayers reported £55.4bn of net gains (after deduction of losses) and paid out £8.3bn of CGT to the government. By way of comparison, £180bn of income tax was paid in that that year by 31.2m individual taxpayers.
The reality is, however, that a significantly larger number of 500,000 taxpayers are obliged to report on potential capital gains each year, with many of these making losses or with no tax to pay (because any net gain is covered by the annual exempt amount of £12,300). The reasons why most people don’t know much about CGT are simple: over 70% of those paying it in the 11 tax years to 2017-18 did so only once during that period.
The OTS report covers many different areas; not just moving home or getting divorced, but also running or investing in a business and issues affecting land transactions. They are concerned that the general public has a low level of awareness of CGT and they clearly believe that the administrative systems that underpin CGT could do much more to support taxpayers.
One area identified as requiring reform is UK property tax returns. These are submitted by around 150,000 individuals, who make a disposal of UK residential property each year, 85,000 of whom have a taxable gain and need to file a UK property tax return within 30 days. The OTS believes that even if someone does have reasonable knowledge of the system, the 30-day deadline can be challenging.
The OTS recommendation is for government to extend the reporting and payment deadline for the UK property tax return to 60 days, or to instruct estate agents or conveyancers to make sure their clients receive the necessary HMRC information so they know what they have to do.
More specifically, the OTS report makes 14 recommendations. Key amongst these are:
Integrating CGT into a single customer account, simplifying matters for owners of more than one property (where taxpayers have more than one eligible home, they can choose which home they wish to benefit from the relief by making a nomination to HMRC).
Reform related to divorce/separation is also mooted. Currently, married couples or civil partners can transfer assets between them without triggering an immediate charge for CGT. Couples who are separating currently benefit from this rule in the tax year in which they separate, but in subsequent years transfers take place at market value in accordance with the normal CGT rules. It is considered that, given the length of time it takes to get divorced (around one year), this is insufficient time for couples to re-order their affairs. The OTS recommends operation of this rule is extended to the later of the end of the tax year at least two years after the separation event, and 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 are also recommendations for business owners, where the proceeds from the sale of a business or land can be received in several different ways, sometimes paid over a number of years or in a combination of cash and other assets such as shares. For the more complex types of business and land sales there are practical tax issues, sometimes resulting in tax having to be paid upfront before any cash has been received, thus impacting on commercial decision making. The OTS recommends that CGT should be paid at the time the cash is received in situations where proceeds are deferred, such as on the sale of a business or land, while preserving eligibility to existing reliefs.
I suspect that many of you, having read this, will be scratching your head somewhat. CGT, like most things to do with tax is often difficult for taxpayers to understand. That’s why we’re in business!
Vivian Linstrom, M&S Accountancy and Taxation