Reforming capital taxes – Government response

21 January 2022

After a considerable delay, the Treasury has published the Government’s responses to the most recent reviews undertaken by the Office of Tax Simplification (OTS) into inheritance tax (IHT) and capital gains tax (CGT). Depending on your point of view, these responses are either reassuring or underwhelming: with the exception of some largely technical amendments, all of the OTS’s proposals have been politely shelved.

Inheritance tax

In response to the OTS’s 11 proposals in its second report on IHT, the Financial Secretary to the Treasury wrote that:

‘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.’

This amounts to a comprehensive rejection of the proposals to reform IHT, and the ‘if’ is very telling – clearly the reform of IHT is not on the Government’s agenda for the foreseeable future.

In practice, this rejection removes the short-term risk of gift taxes and restrictions on IHT reliefs for business/agricultural assets, but it does also leave in place over 35 years of accumulated legislation, so don’t expect the IHT rules to get any simpler.

Capital gains tax

The Treasury response to the OTS’s CGT proposals is more nuanced, but in many ways the result is the same. Of the 14 specific proposals made in the OTS’s second CGT report, four have been rejected outright, five are under consideration and five have been accepted, although no specific response is provided to any of the 11 recommendations made in the OTS’s first report. As a flavour, radical changes such as removal of CGT rebasing of assets on death appear to have been rejected, and the accepted proposals include agreement that HMRC should improve guidance on some specific subjects. Overall, although there will be changes that will be welcome to a few, most taxpayers will not notice any difference.

In explaining her response, the Financial Secretary noted that:

‘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.’

Since the OTS has just given careful thought to the subject, this strongly suggests that we will not see any major reforms such as equalising CGT and income tax rates before the next general election.

What next?

The process of government is all about reviewing options and making choices. The responses to the OTS make it clear that the Government does not currently view capital taxes as a good area in which to invest scarce Treasury and HMRC resources, and although reform of elements of IHT and CGT would be very welcome, it is easy to understand that there are currently bigger priorities elsewhere.

The practical implication of the Treasury responses is to create a period during which taxpayers can plan with a higher degree of confidence. Although changes in CGT rates or removal of existing tax reliefs before the next election are still possible, they now seem much less likely than was previously thought. With a wealth tax also looking extremely unlikely to be introduced anytime soon, for better or worse it looks like the current rules taxing death and disposals will be here for a while yet.

For more information, please get in touch with Andrew Robins, or your usual RSM contact.