As now seems to be the new tradition, the government followed up the Autumn Budget with a Tax Administration and Maintenance Day on 30 November 2021. HM Treasury and HM Revenue and Customs released a number of announcements on the day, including new policy consultations, reports on the outcome of previous consultations, and the long-awaited government response to the Office of Tax Simplification’s reports on Capital Gains Tax (CGT) and Inheritance Tax (IHT).
Office of Tax Simplification (OTS)
The response to the OTS will come as a relief to many members who had been concerned about the wide-ranging recommendations made by the OTS in recent reports. On CGT, the OTS’s recommendations had included abolishing the tax-free uplift on death where assets were inherited free of IHT due to Business Property Relief (BPR), Agricultural Property Relief (APR) or the spousal exemption, as well as proposing that the rates of CGT be increased to align them with the substantially higher income tax rates.
The OTS recommendations on IHT went even further, with wide changes proposed to the exemptions available for gifts, as well as a proposal that BPR should only be available for businesses carrying out at least 80% trading activities (compared to the current 50% threshold) which could have been a disaster for diversified rural businesses. The CLA has of course been making the case against changes to capital taxes that would cause problems for the continuity of rural businesses.
The Government’s Response
The letter from HM Treasury to the OTS published on 30 November confirms that the government does not intend to proceed with changes to IHT at the moment, albeit noting that they would be borne in mind “if the Government considers reform of IHT in the future”. The implication seems to be that major changes to IHT would be too difficult, politically and technically, and so are perhaps unlikely to happen at least until after a change of government.
Similarly, the government is steering clear of the more major changes proposed to CGT, but has nevertheless declared its intention to move forward with some other technical changes put forward by the OTS. These include an extension to roll-over relief in cases of compulsory purchase, a policy for which the CLA has been arguing since 2014. The CLA met with HMRC to discuss this point in 2017 and set out the case for it in its response to the OTS’s Review of CGT in 2020. Currently, the relief only applies where the proceeds from the sale are reinvested in new land which prevents a landlord from reinvesting in a new building on retained let land. The government has now agreed to extend the rules for qualifying expenditure to include enhancing land already owned which will be welcome news for those with let land affected by compulsory purchase. A consultation on the detail is promised, and the CLA will be taking this opportunity to ensure the new rules give landowners subject to compulsory purchase, the opportunity to decide for themselves how best to reinvest these proceeds.
Another change agreed by the government, which can be welcomed and reflects the CLA’s call for change in its response to the Review of CGT, relates to the CGT rules applying between married couples and civil partners. Transfers between spouses and civil partners are made on a ‘no gain, no loss’ basis, but only while they are living together and in the tax year that they separate. Separations and divorces will frequently involve transfers of assets between the parties, and the breakdown of a relationship is of course not something that can be timed according to the tax calendar. Depending on when a couple cease living together, they may have anything from a year, down to less than a full day, to agree on and put into effect the transfer of assets, which, in an emotive situation is often going to be impractical. The OTS proposed that this is extended to the end of the tax year at least two years after separation, or the time set for a transfer of assets in an agreement approved by the Court, if later, and the government has agreed to consult on the detail of such an extension.
Justifications for Reliefs
One other document released as part of the Tax Administration Day was a spreadsheet compiled by HMRC setting out the rationale behind each tax relief and exemption.
While this does not change anything, it does give an interesting insight into the government’s own thinking behind these reliefs. Members may be interested to hear that HMRC considers that APR is intended “To ensure agricultural businesses or farms do not have to be sold or broken up following the death of the owner” and that BPR is intended “To ensure businesses do not have to be sold or broken up following the death of the owner”. In a climate where some have feared these reliefs might be withdrawn altogether, this may offer some comfort, and should any threats to the reliefs arise in the future, the CLA will of course be happy to remind HMRC of why the reliefs are so important.