New OTS report suggests improvements to make Capital Gains Tax work better
In November 2020, the Office for Tax Simplification (OTS) issued a radical report suggesting major structural changes to Capital Gains Tax (CGT). On the 20 May 2021, a second report was released. This latest report looks at areas where the tax could be made simpler, fairer and easier to understand and where specific anomalies could be removed.
Most of the suggested actions are of general application, covering such areas as tax administration, share pooling, private residence issues, foreign assets and the CGT rules relating to divorce. It should be stressed that these are merely recommendations and there is no guarantee that they will pass into legislation, but given that they are mostly administrative (or changing what would appear to be unintended consequences of existing legislation), we would hope to see them pass into law in the next Budget or even sooner.
Whilst, sadly, these can all be relevant to agricultural businesses, considerable thought has been given to the CGT position of the farming industry with some 13 pages of the report dealing with land and property issues. As a result, there are a few recommendations which are of far greater interest, particularly where land is being sold for development:
Where land or a business is sold, the proceeds can sometimes be received some time after the sale, and in certain circumstances, after the CGT has become due. Some limited relief is now available, but the report suggests considering a change in the rules such that CGT would become due only when the proceeds are received (recommendation 8).
Under current legislation a landowner can be disadvantaged when land is subject to a compulsory purchase order (CPO). Although a limited form of rollover relief is permitted, there are restrictions on the nature of the replacement assets, and time limits and availability can also be problematical, particularly for a large project such as HS2 (which is expected to generate 50,000 CPOs). A project of this scale can distort the whole regional property market, but road schemes and large-scale developments can have similar local effects. It is suggested that the conditions are relaxed towards something more fair and more practical (recommendation 12).
The report also examines areas where HMRC guidance is unclear. One of these relates to the availability of Business Asset Disposal Relief, which reduces the tax rate where qualifying assets are sold as part of ceasing a business. Typically, in a farming context, land will be sold, but the vendor will retain the right to harvest the standing crops after the sale has been completed. There is an argument that he will no longer be “trading”, merely realising assets which he held at cessation, but the legal position is unclear and where significant amounts are at stake it can be safer to arrange quite complex legal protections by way of cross options. The recommendation is that “HMRC should include more detailed examples in their manuals about how they interpret the legislation in certain situations where the date of cessation is unclear to help and reassure farming businesses and others looking to retire over a period”.
Recognition is given to the uncertainties which can already arise about the CGT impact of diversification, together with the new concerns around how environmental schemes will be treated for tax purposes. Although the report gives no recommendation on this issue, it concludes: ”The government will need to do further work over the coming years to understand how certain tax rules and environmental payment schemes interact. For example, some changes in land use could affect the trading status of a farming business. It is not for the OTS to recommend that the government change its policy in this area, but where certain tax rules and environmental objectives create different incentives, this should be a deliberate decision rather than an accidental one. Failure to coordinate effectively could create unnecessary barriers to wider environmental policy aims.”
Where large scale land development takes place, it is common for land pooling arrangements to be implemented but the treatments of these for CGT purposes can be complex and the potential loss of reliefs (and danger that income tax may also be triggered) can have a negative impact on participation. It is suggested that the government should explore ways to make land assembly more tax neutral, and “it should work collaboratively with landowners, developers, industry experts and tax professionals to design something that works in most situations. However, there is in any event clear potential for better and more comprehensive HMRC guidance in this area - currently there is no specific guidance on land pooling issues - and for a greater facility for a clearance procedure”.
This report has really addressed some of the issues which are unclear and can be of great concern for our farming clients. Sadly, on this occasion, the OTS is only a recommendatory body, but we would be really pleased if the Government takes this report on board.
For more information on any of the above, or to find out more about how we can help with any area of accounting for farms and rural business, please get in touch with your usual contact. You can find contact details on the Our People section of the Larking Gowen website. Alternatively, call 0330 024 0888 or email firstname.lastname@example.org
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