Introduction

The Northern Ireland (“NI”) Tax Committee of Chartered Accountants Ireland is pleased to present this discussion paper examining some of the main complexities of capital gains tax (“CGT”) legislation in the UK. Information about Chartered Accountants Ireland and the Northern Ireland Tax Committee is provided on the previous page.

This paper was first discussed with the Office of Tax Simplification (“OTS”) at a joint workshop with this Committee in November 2019. CGT was chosen by the OTS as one of its two topics of the four topics on the agenda for discussion at the workshop. The paper has therefore been updated in response to OTS’ “Capital Gains Tax review call for evidence and survey”1 launched in July 2020.

Of the £634.6 billion in taxes collected by HMRC in 2019/20, CGT receipts totalled £9.976 billion2. In recent years, CGT legislation has become increasingly complex. In particular, the quantum and complexity of CGT reliefs has grown and there are now four differing rates of CGT. Several new regimes have also been introduced which impact specifically on non-residents disposing of UK property and new rules took effect from 6 April 2020 for UK residents disposing of residential property. The knock-on impact of this complexity is widely felt across the UK by both tax and legal professionals, businesses and ultimately taxpayers.

The comments and recommendations made in this discussion paper are based both on feedback received from members of the NI Tax Committee and the wider membership of Chartered Accountants Ireland.

This paper does not examine the administrative complexities of UK CGT in detail. The administration of taxes in the UK, including filing and paying tax for individuals, is examined in a separate discussion paper which is available on our website.

CGT – history

UK CGT was first introduced in 19653 on gains made on the disposal of assets by individuals, personal representatives and trustees. The UK CGT regime was majorly reformed from 6 April 2008. This reform included the introduction of a single 18 percent rate of CGT in addition to the withdrawal of business asset taper and indexation relief and the introduction of a new CGT relief, entrepreneurs’ relief (“ER”) now known as business asset disposal relief (“BADR”).

The history of UK CGT up to 2010 is set out in a House of Commons Library research briefing document4. “Capital gains tax: recent developments”5 sets out the main reforms in CGT from the 2010 Budget to the most recent Budget in March 2020.

Today, the Taxation of Chargeable Gains Act 1992 (“TCGA 1992”) is the primary Act of Parliament concerning UK CGT. UK CGT legislation also comprises Regulations, Statutory Instruments, Statements of Practice and Extra-Statutory Concessions. Legislation is also accompanied by published HMRC guidance, help sheets, policy papers, toolkits and manuals.

CGT – sequence of major changes

Although UK CGT legislation has always contained a layer of complexity, recent years has seen a series of continued piecemeal patches, amendments and changes in addition to the introduction of additional rates, reliefs (and the curtailment of some reliefs) and new regimes which has resulted in the unprecedented level of complexity we see today. This is particularly so in the context of the number of applicable rates and regimes and the quantum (and complexity of reliefs) available.

The sequence of some of the most significant changes can be summarised as follows: -

• 6 April 2008, the introduction of ER;
• 6 April 2008, major reform of the remittance basis;
• 23 June 2010, the introduction of the 28 percent rate of CGT for gains not within the basic rate band;
• 6 April 2012, the introduction of the Seed Enterprise Investment Scheme and its associated CGT reliefs;
• 6 April 2012, the introduction of Business Investment Relief and relief for sales of exempt property for remittance basis users;
• 1 April 2013, the introduction of disincorporation relief (now defunct);
• 6 April 2013, the introduction of the CGT provisions in relation to properties falling within the annual tax on enveloped dwellings regime;
• 6 April 2013, the introduction of the Statutory Residence Test and accompanying transitional provisions in relation to matters such as the temporary non-residents legislation;
• 6 April 2014, the introduction of the Social Investment tax relief scheme and its associated CGT reliefs;
• 6 April 2014, reduction in the final 36 months rule for private residence relief to 18 months;
• 6 April 2016; the introduction of Investors’ relief;
• 6 April 2016, the reduction in the rates of CGT from 28 percent and 18 percent to 20 percent and 10 percent respectively; except in relation to residential property disposals (and carried interest);
• 6 April 2016, the introduction of the non-residents CGT regime in respect of UK residential property disposals;
• 6 April 2017, the introduction of the two concepts of deemed domicile for CGT and related transitional provisions including 6 April 2017 rebasing;
• 6 April 2017, amendments to Business Investment Relief;
• 6 April 2017, amendments to the Substantial Shareholdings Exemption;
• 31 December 2017, the freezing of indexation relief for companies;
• 6 April 2019, the extension of the non-residents CGT regime to direct and indirect disposals of all UK land and property;
• 11 March 2020, amendments to ER including the reduction in the lifetime limit to £1 million and the name change to BADR;
• 6 April 2020, the change to the payment date and filing date of CGT on residential property disposals by UK residents to 30 days;
• 6 April 2020, further amendments to private residence relief to reduce the final period exemption from 18 months to 9 months and changes to lettings relief;
• 6 April 2020, changes to the corporate capital losses regime;
• Various dates – amendments to the remittance basis of taxation for non-UK domiciles; and
• Various dates – increases in the ER lifetime limit to the previous lifetime limit of £10 million, and miscellaneous amendments to ER rules (see later).

The above summary is just a flavour of some of the most complex major changes. Some specific changes are dealt with in more detail in the next section of this document where they have resulted in a high level of complexity for taxpayers and their advisers.

Rates of CGT

From 6 April 2008, one single 18 percent rate of CGT was introduced. However just over two years later, from 23 June 2010, a further 28 percent rate of CGT was introduced for taxable gains not within a taxpayer’s basic rate band. From that date, in calculating the applicable rate(s) on taxable gains, CGT is treated as the very top slice of income.

From 6 April 2016, two further rates of 10 percent and 20 percent were introduced. The 18 percent rate was reduced to 10 percent and the 28 percent rate was reduced to 20 percent. The 18 percent and 28 percent rates were maintained, however, for residential property gains (and carried interest).

Complexity arises because an individual’s rate (or rates) of CGT on taxable gains cannot be determined with certainty in many cases at the time the asset is disposed of unless the conditions for ER/BADR are met. As taxable gains are treated as the top slice of income, the rate (or rates) payable is determined by the individual’s overall taxable income profile, after deducting any available personal allowance in the same tax year. This means that unless an individual has a predictable income tax profile, it is often difficult to determine the exact amount of CGT which will arise until after the end of the relevant tax year of disposal.

In some cases, this may mean that a taxpayer may delay the decision to dispose of CGT assets, perhaps until a tax year where they may have more certainty over the applicable rate.

A taxpayer may also have gains taxable at several rates within the same tax year. For example, this would apply where ER/BADR is available on a qualifying business disposal, and in respect of residential property gains, the taxpayer has some basic rate band left but the available basic rate band (not deemed to be used by the ER/BADR gain) is not sufficient to cover the entire residential property gain. In such cases, three rates of CGT (10 percent, 18 percent and 28 percent) apply within the same tax year.

CGT reliefs

The UK tax code has a large suite of CGT reliefs rightly targeted at specific scenarios such as incorporations, business failures, succession planning, replacement of business assets, substantial shareholdings and entrepreneurial activity.

The main reliefs currently available are as follows: -

• Rollover relief – Section 152 TCGA 1992;
• Incorporation relief – Section 162 TCGA 1992;
• Holdover relief – Section 165 or Section 260 TCGA 1992;
• BADR (formerly ER) – Sections 169H-169V TCGA 1992;
• Investors’ relief – Section 169VA-169VX TCGA 1992;
• EIS reliefs – Schedule 5B TCGA 1992;
• SEIS reliefs – Schedule 5BB TCGA 1992;
• Social investment tax reliefs – Section 255A-E TCGA 1992;
• Loan to trader relief – Section 253 TCGA 1992;
• Negligible value relief – Section 24 TCGA 1992;
• Private residence relief – Section 222 TCGA 1992;
• The substantial shareholdings exemption - Schedule 7AC TCGA 1992;
• Indexation relief (limited application) – Section 53 TCGA 1992; and
• Business investment relief – Section 809VA – 809ZFA Income Tax Act 2007.

The main area of complexity arises from the constant level of changes to some of these reliefs in recent years and the introduction of several new reliefs without prior consultation or consideration. ER/BADR, in particular, has been subject to almost constant change since 2015 – we examine this in more detail below.

Complexity also arises where a taxpayer has a choice between different reliefs on the same transaction particularly where the relief is a deferral relief on which ER/BADR is also available.

Each relief also has its own suite of conditions and time limits. Often, these conditions require constant monitoring to ensure their continued application. Within some of the reliefs there are also identical terms, such as personal company, which have different meanings depending on which relief is applicable. For example, personal company is defined differently for the purposes of ER/BADR and section 165 gift (or holdover) relief.

There can also be scenarios where there is an interaction between reliefs. This is generally the case if a relief is partial only, for example, section 165 holdover relief on gifts at undervalue where the excess cash is immediately taxable which may mean the remaining gain potentially qualifies for ER/BADR.

In respect of gains which qualify for the SEIS reinvestment relief, as that relief only exempts 50 percent of the gain up to a maximum of £50,000, the remaining gain not relieved may also qualify for EIS deferral relief. This means that the investor and their adviser will be required to both check if the investor is a qualifying investor for the purposes of each of these regimes but also if the company meets the different qualifying criteria of each regime with separate advance assurance schemes applying to each.

Business Assets Disposal Relief (formerly known as Entrepreneurs’ Relief)

Since its initial introduction in April 2008, ER began life as mostly stable, although it was initially subject to a sequence of increases in the lifetime limit up to and including 6 April 2011. However, since the 2014 Autumn Statement, ER was subject to a pattern of almost constant change with amendments in Finance Act 2015, 2016 and most recently 2020.

The first major change was implemented from 3 December 2014 and largely removed the availability of ER in respect of goodwill gains on incorporation. Part of this legislation was later repealed in the Finance (No. 2) Act 2015 less than a year after the original announcement.

Other changes in recent years were also made to the associated disposal rules, the trading company test and the interaction of ER with EIS deferred gains. More recently the conditions for ER were tightened up in Finance Act 2019. In particular, the 12-month holding period for qualifying ER assets was doubled to 24 months. In Finance Act 2020, the lifetime limit of £10 million which had been in operation since 6 April 2011 was reduced to £1 million with complex anti-forestalling legislation also taking effect. The relief was also rebranded as BADR.

These changes all came against a backdrop of criticism that the relief was not achieving its aim of encouraging entrepreneurial activity. A 2014 report from the National Audit Office’s 20146 also examined ER and found its cost in 2013–14 to be more than three times HMRC’s original forecasts had suggested. That report also found that ER has seen the most significant rise in costs over its lifetime. The relief came in for further criticism in the National Audit Office’s February 2020 report on The Management of Tax Expenditures7.

HMRC’s capital gains tax statistics set out that the relief cost £2.77 billion in 2018–198 and was claimed by 46,000 taxpayers. Of this, £2.1 billion in relief went to just 5,980 taxpayers9, achieving an average tax saving of approximately £351,170 each. The estimated cost of the relief in 2019-20 is £2.1 billion.10

In its 2018 Business Lifecycle Report11, the OTS stated it saw no evidence that ER “encourages further investment in new business ventures”. Possibly a more likely cause for new investments made with the proceeds of ER transactions is the desire of taxpayer to ensure that they convert this into assets which qualify for the inheritance tax relief, Business Property Relief, as that relief has a less onerous “business” test than the ER “trading” test.

Finance Act 2020 therefore implemented major changes to ER rebranding the relief as BADR and reducing the lifetime limit from £10 million to £1 million effective from 11 March 2020. It is therefore hoped that the relief will now remain static and not subject to further changes in future Budgets.

Investors’ relief

Investors’ relief (“IR”) was announced in Budget 2016 and introduced in Finance Act 2016. Similar to BADR, it provides a 10 percent rate of CGT also within a lifetime limit of £10 million but applies to gains on the disposal of shares in unlisted trading companies (or the holding company of a trading group) where the shares are held for a three year period commencing from 6 April 2016.

The first gains qualifying for IR therefore did not crystallise until 6 April 2019 at the earliest; the relief is expected to cost £60 million by 2020–2112.

As a further tax relief for external investors in trading companies, IR is now part of the patchwork of UK tax reliefs designed to encourage investment and entrepreneurial activity in the UK. These reliefs each contain different qualifying conditions, time limits and administrative requirements.

Before its Budget announcement, IR was not subject to any prior consultation and no research or evidence was provided to support the case for its introduction. The announcement of this new relief presupposed that there was a policy need for the relief which could not be met through Government spending or a new incentive to encourage external investors to hold shares for the longer term.

This failure to consult goes against the Government’s own Tax Consultation Framework13 which requires, at stage 1, the setting out of objectives and identifying options. This is also not in accordance with the Government’s Tax policy making: a new approach14 framework which very clearly sets out the importance of consulting early in the tax policy making cycle, including considering the case for change.

The impact of failing to consult was clear as the draft IR legislation made its way through Parliament in subsequent months after Budget day – a number of amendments and relaxations were made to the employee condition, for example, to allow “business angels” to become an unremunerated director and enable the company to benefit from their knowledge, skills and expertise.

Non-residents CGT regimes

The non-residents CGT (“NRCGT”) regime was first introduced for disposals of UK residential property on or after 6 April 2015. The legislation is complex in terms of the non-residents and property types it applies to and the calculation of the resultant gain or loss. Non-residents can, broadly, choose the calculation method (one of three possible methods) which results in the lowest NRCT gain or highest NRCGT loss. The regime also contains rebasing provisions and required amendments to other related areas of the CGT code, principally to private residence relief.

This regime is also accompanied by a separate administrative regime which requires the taxpayer to report and pay the relevant CGT within 30 days of the conveyance of the property using a special online form. The relevant return must be submitted with 30 days even if there is no tax to pay with penalties potentially applicable for failure to do so.

From its introduction in 2015, the lack of advanced publicity and communication from HMRC about this major change has been criticised with many non-residents caught by the regime genuinely unaware of it and many missing the 30-day deadline and incurring penalties as a result. This regime is also still not widely known within the UK legal profession.

This has resulted in a flurry of cases proceeding through the Tribunal system with a mixture of decisions both in favour of the taxpayer and in favour of HMRC. These cases have resulted in a lack of clarity in respect of when reasonable excuse will apply in the context of this regime. However, several cases where the appeal was successful, very clearly set out that HMRC’s often used argument that there could be no reasonable excuse because there was ample publicity of the regime, fell on further scrutiny. One such case is McGreevy v HMRC [2017] UKFTT 069015.

The case of Kirsopp v HMRC [2019] UKFTT 21716 is also worthy of mention. The First Tier Tribunal (“FTT”) allowed the taxpayers’ appeal against the NRCGT penalty charged by HMRC. Recognising that there had been a divergence of opinion among FTT judges in previous cases on the issue of reasonable excuse for late filing in NRCGT cases, the Judge drew attention to the decision of the Upper Tribunal in Perrin v HMRC [2018] UKUT 0156, which held it was a matter for the judgment of the FTT in each case to determine whether it was objectively reasonable for the particular taxpayer to have been ignorant of the requirements in question.

In the Kirsopp case, the Judge specifically rejected HMRC’s argument that a taxpayer has an obligation to keep up to date with the law and held that there is no such obligation. Whilst a penalty may arise from an inexcusable breach of the law, it could not arise from the taxpayer’s failure to keep up to date with changes in tax law. In those circumstances, he concluded that the taxpayers had displayed a reasonable regard to complying with their tax obligations and remedied their failure within a reasonable time after they discovered the true position. They therefore had a reasonable excuse.

The NRCGT regime was further extended, from 6 April 2019, to direct and indirect disposals of all UK land and property by non-residents. These rules are also extremely complex and once again include several calculation methods and a 30-day reporting and payment window. The indirect disposal provisions are particularly complex and, as their name suggests, will mean it will not always be obvious to a non-resident that they have a UK tax obligation arising.

Residential property disposals by UK residents

From 6 April 2020, UK tax residents are required to report and pay CGT on all residential property disposals within 30 days of the date of completion of the disposal (rather than the current deadline of 31 January following the end of the tax year in which the sale is made). This represents a major change from current practice where there can be anywhere between 10 and 22 months between the disposal of a residential property and the requirement to report and pay the relevant CGT.

Many tax professionals are unlikely to be aware of disposals of residential property by their clients at the time of the disposal. Even with forewarning, and appropriate messaging, it is very likely that not all disposals will be notified to agents in a sufficient timespan to meet the 30-day deadline.

These transactions must also be reported to HMRC online using a specific form for the payment on account return, which must also include a calculation of the projected tax liability. Like the NRCGT regimes, the calculation of this liability for UK resident individuals is not straightforward unless the taxpayer has a static predictable income tax profile. In many cases the calculation will require an estimate of the individual’s income and other CGT transactions in order to complete the payment on account, return and assess the relevant CGT rate.

In cases where the taxpayer errs on the side of caution and decides to pay the 28 percent rate but the rate is later found to be 18 percent, this could force the taxpayer to file the relevant self-assessment much earlier than is needed to secure the relevant refund. Alternatively, in scenarios where 18 percent is wrongly paid upfront, the taxpayer is exposed to underpaid tax which may only come to light as late as 22 months later when their self-assessment is filed. This could create issues in financing any underpayment almost two years later; and will also lead to interest and potential penalties.

Impact of complexity

Because of these complexities, tax professionals now need to ask a myriad of questions of a client in order to be able to calculate their CGT liability and advise them on the tax efficiency of potential investments. There are several potential rates and regimes which must be considered. This is before the adviser even considers the possibility of exemptions, reliefs and anti-avoidance rules which may apply.

In the context of property disposals, the current rules for non-residents and the shortened timespan for UK residents on residential property disposals, which took effect from 6 April 2020, have a particular impact on the legal profession who are often the first point of contact with a professional that a non-resident has when disposing of UK property.

When considering potential reliefs, taxpayers, and ultimately their adviser, must consider which potential reliefs are available, the differing conditions for these reliefs, the relevant time limits and any longer-term implications, all in the context of their client’s particular circumstances. Conditions often must be kept under constant review and advisers may be required to consider how various reliefs interact with each other, and if possible, future actions might jeopardise relief.

Taxpayers, who are not tax experts, need to take advice from a tax professional to navigate this complex legislation. This complexity is often disproportionate to the amount of tax at stake, and unfair outcomes can arise for both the taxpayer and HMRC. This complexity comes at a cost for all parties involved.

Ultimately, it is the taxpayer who bears the cost of this increased complexity where they either engage a tax professional to navigate the rules for them or, for those that don’t, the cost of errors made.

Long term certainty and stability in the UK CGT regime would assist entrepreneurs. For many entrepreneurs, building a business is a long-term matter. If UK CGT policy keeps changing it can never be effective as an incentive or policy lever for entrepreneurial behaviour. Business owners will instead concentrate on the building/growing their business and then later deal with whatever CGT regime exists at the point in time they might decide to sell.

CGT – the Irish experience

In contrast to the UK’s CGT regime, Irish CGT legislation does not contain the same level of complexity. Firstly, there is one main 33 percent rate of CGT (differing rates only apply to some very specific niche transactions such as windfall gains and foreign life assurance policies).

Although Ireland does have several CGT reliefs which apply to specific scenarios such as incorporations, succession planning, replacement of business assets and entrepreneurial activity, there is simply not the same quantum of reliefs available as there are in the UK.

In the lead up to Budget 2020, the Irish Minister for Finance came under sustained pressure to increase the €1 million lifetime limit for revised entrepreneur relief which provides a 10 percent CGT rate on disposals of certain business assets. Indecon, an independent economic research organisation, was tasked with carrying out an evaluation of revised entrepreneur relief in the context of its relevance, cost and impact.

Indecon’s evaluation17 found that in the majority of cases the relief was not the primary motivating factor when making decisions about investing in assets. Their analysis also suggested that while there is a rationale for the relief, it is necessary to consider its efficiency and whether the likely benefits exceed the exchequer costs.

In light of Indecon’s evaluation, the Minister for Finance did not bow to pressure to simply increase the lifetime limit and announced there would be no changes to the relief at that time18. Instead, the Department of Finance was tasked with considering the findings of the Indecon review to determine any changes that could be made to the relief to better support entrepreneurs and entrepreneurial activity.

This resulted in some minor changes to revised entrepreneur relief in Budget 2021 with the lifetime limit remaining unchanged at €1 million. Previously, an entrepreneur had to own at least 5 percent of a company for a continuous period of three years, in the five years immediately prior to the disposal, in order to qualify for this relief. Now however, they must have owned at least 5 percent for a “continuous period of not less than 3 years at any time prior to the disposal of those shares”.

These changes are targeted at allowing expansion of a business, without curtailing the potential to access the relief. The relief also includes a requirement for a qualifying person to have worked in the business for three out of the five years before the disposal. This is specifically aimed at ensuring that the proposed amendments to revised entrepreneur relief which are set out in Finance Bill 2020 would not serve to benefit passive investors so that the relief is targeted at true entrepreneurs.

This much more cautious approach to improving reliefs for entrepreneurial activity is likely to be more successful, targeted and cost centric. It should, if carried out with appropriate due diligence, not result in a scenario, like in the UK, where ER subsequently had to be amended and curtailed with suggestions that ER should be scrapped altogether19 culminating in the changes to this relief in the March 2020 Budget.

Ireland also operates a form of withholding tax on specific CGT transactions. A CG50A clearance certificate must be applied for in respect of disposals of assets for over €500,000 and house/apartments for over €1 million. However, if the taxpayer does not meet the relevant criteria for a CG50A, the buyer is obliged to withhold 15% of the purchase price. This CG50A is not available to non-residents.

Executive summary and recommendations

The analysis in this paper clearly signposts the high level of complexity of the UK CGT regime. We therefore recommend that: -

1. The OTS report on the outcome of this review should examine the following specific matters:-
   • An evaluation of the CGT reliefs targeted at entrepreneurial behaviour with a specific focus on BADR.

This review should consider the relevance, cost and impact of each relief but should also address if the intended purpose could alternatively be delivered through government spending or another incentive; and

• A review of the rates and calculation of CGT to also consider the merits of returning to one single rate for all transactions.

This should examine the careful balancing act between the desire to minimise the scope for tax avoidance created when capital gains are taxed more lightly than income, and, secondly, the importance of maintaining capital taxes at a rate which still encourages investment and entrepreneurial behaviour. No effective tax system should distort behaviour without good reason.

2. The UK Government should undertake a more detailed annual review of tax reliefs in the UK.

In its most recent report in this area “The management of tax expenditures”, the National Audit Office20 continue to criticise HMRC and HM Treasury for not keeping track of tax reliefs intended to change behaviour, or to adequately report Parliament on whether tax reliefs work as expected.

Although the report sets out that both HMRC and HM Treasury have responded to previous recommendations by increasing their oversight of tax expenditures and actively considering their value for money, these steps are welcome and are very much still in development.

The report concludes “The large number of tax expenditures means it will take time to identify and embed good practices. Both departments need to make substantial progress and ensure sufficient coverage and rigour in the work they undertake on this matter.

On their own these improvements will not be sufficient to address value-for-money concerns unless the departments formally establish their accountabilities for tax expenditures and enable greater transparency. Lessons can be learned from other countries that have established clear arrangements for evaluating and reporting on tax expenditures. We look to HM Treasury and HMRC to follow suit by clarifying arrangements for value for money and improving the evaluation and public reporting of tax expenditures.”

In Ireland, the Department of Finance has been reporting annually since 2015 on tax expenditures in Ireland21. In 2014, the Department set out new Guidelines for best practice in ex ante and ex post evaluation of tax expenditures22. Whilst the UK Government does publish the cost of tax reliefs, this could go further and could usefully draw upon the Irish guidelines and process for tax reliefs and expenditures.

3. HMRC should launch a widespread education campaign in respect of both the non-residents CGT regimes and the 6 April 2020 changes for UK residents.

As set out earlier, the decisions in some Tribunal cases have criticised HMRC for lack of forewarning and education of previous changes. This is supportive of the argument that the complexities of the NRCGT regime for non-residents warrants a special education campaign to make non-residents and their advisers aware of their obligations in respect of UK tax. However, there is no doubting that this will be difficult to achieve, as those ultimately affected are non-residents especially where they do not have a UK tax adviser, or the UK conveyancer is not aware of these rules.

To date, the recent and forthcoming changes have also not been well sign-posted by HMRC and there is a risk that the Tribunal system will once again be flooded by penalty appeals in scenarios where both property conveyancers and vendors are genuinely not aware of these major changes. One potential route to achieving more widespread education could be via using the information HMRC already holds under the non-resident landlord’s regime.

We look forward to engaging in further discussion on this discussion paper.

Freedom of Information

We note the scope of the Freedom of Information Act with regards to this position paper. We have no difficulty with this position paper being published or disclosed in accordance with the access to information regimes. This position paper will be published on our own website in due course and will be available to all our members and the general public.