OTS CGT Review Update – The Final Report

The Office of Tax Simplification (OTS) finally published their second and final report of their review of Capital Gains Tax (CGT).  The report can be read in full here.

The first report, ‘Simplifying by design’, was published in November 2020 and considered the policy design and principles underpinning the tax.  This second report considers a range of key practical, technical and administrative issues, on the basis of the present policy design principles of CGT.

Both documents are based on findings from the OTS’s analysis of evidence and feedback gathered during a consultation exercise from July to November 2020.  The OTS received contributions from representative bodies, professional advisers, businesses, academics, public survey and a specially formed Consultative Committee.

The latest report also highlights a broader concern about the low level of public awareness of the tax, and the extent to which the administrative systems could do much more to support taxpayers.

The OTS make 14 recommendations, three aim to make a difference over the long term, some are standalone issues and the majority address issues that affect significant groups of people.  The recommendations fall the following areas:

  • Main Home.
  • Divorce and separation.
  • Business Issues
  • Investor Issues.
  • Land and property issues.

The Investor Issues section mainly focussed on the Enterprise Investment Scheme and the Seed Enterprise Investment Scheme.  These schemes are intended to provide support for growth investment in start-up and early-stage companies by giving generous tax reliefs to investors who subscribe in cash for new shares in those companies.

However, some evidence was also considered regarding foreign assets.  HMRC statistics suggest that approximately one in ten people in the UK have foreign assets.  The examples highlighted in the report show “when a UK resident taxpayer buys or sells a foreign asset their acquisition cost and proceeds are converted into sterling at the respective point in time in order to calculate the gain/loss.  This means that their actual gain/loss in the foreign currency asset is ignored for CGT purposes.  The current system means that a tax liability can arise when there is a gain as a result of foreign currencies appreciating against sterling.  Equally a taxable loss could arise due a weakening of sterling against the foreign currency”.

However, there is also a specific CGT exemption for foreign exchange gains/losses that result from transfers in a foreign currency bank account.  Therefore, when funds are added to the bank account or removed no CGT is liable.

The OTS suggests that it would be simpler if the calculation of capital gains/losses resulting from the disposal of a foreign asset were completed in the foreign currency and then converted to sterling at the exchange rate on the date of disposal.  This adjustment to the rules would remove the need to calculate the sterling equivalent of the acquisition cost and of any subsequent costs.  The report states that “this would be simpler for those taxpayers who operate foreign bank accounts and more intuitive for those reinvesting into foreign assets in the same country.  It would also bring the position into line with the treatment with foreign currency bank accounts where taxpayers are not taxed on currency gains”.

Therefore, a recommendation that we are examining closely is the suggestion for when calculating foreign assets.  The OTS report recommends “the government should consider whether gains or losses on foreign assets should be calculated in the relevant foreign currency and then converted into sterling”.

Though the report is lengthy, there are no major policy change recommendations that would alter the current system.  However, these could still come as part of the Chancellor’s Autumn Statement.

As previously stated, FSL are monitoring the outputs from the review closely to ensure there is minimal disruption to CGiX users.

If you have any concerns about the impact of the review on CGiX or would like to discuss further then please contact:    FSLBA&