ShareSoc Director Cliff Weight has written an opinion piece, which the FT published on 11th January (requires subscription to view). Cliff argues that Capital gains tax (CGT) is hideously complex and needs to be simplified. This is even more urgent as the reduction of the CGT threshold from £12,300 to £6,000 and then £3,000 will draw many more into the net of those having to complete CGT returns.
Long term shareholders of companies, where there have been rights issues, consolidations, capital repayments, demergers and splits require detailed record keeping and the FT article highlights this example:
A UK investor – let’s call her Sue – inherited some shares in aerospace group Flight Refuelling when her father died in 1985. Later, in 2004, her mother passed away and she inherited more stock in the company, which had been renamed Cobham in 1994.
When the group was taken over in the 2019-20 tax year, she needed to work out her capital gains and the tax she owed. A straightforward exercise? Anything but.
After rights issues and consolidations during her period of ownership, all of which affect the calculation of CGT, Sue found herself ensnared in complexity.
Hers is not an uncommon experience for private investors engaging with the CGT regime. Onerous, baffling and unfit for purpose, the rules are in desperate need of updating and reform.
Cliff also highlights another problem is the base cost. For assets owned before 1982, investors must take the market value at March 31 1982 as the “base year” when calculating CGT. Keeping records that go that far back is challenging – and particularly difficult for executors of those who have died.
Recently, Lord Lee asked a Parliamentary Question about CGT, see https://www.sharesoc.org/sharesoc-news/lord-lee-asks-parliamentary-question-about-capital-gains-tax/
ShareSoc will now be writing to the Minister asking to meet to discuss our ideas.
This is a ShareSoc News item published on 11/01/2023
The FT have now allowed me to reproduce the full text of my article.
The following article, written by Cliff Weight, was published in the FT on 11 January 2023
Opinion Capital gains tax
The CGT regime needs root and branch reform
The current system penalises direct share investment
A UK investor — let’s call her Sue — inherited shares in aerospace group Flight Refuelling when her father died in 1985. Later, in 2004, her mother passed away and she inherited more stock in the company, which had been renamed Cobham in 1994.
When the group was taken over in the 2019-20 tax year, she needed to work out her capital gains and the tax she owed. A straightforward exercise? It was anything but.
After rights issues and consolidations during her period of ownership, all of which affect the calculation of CGT, Sue was ensnared in complexity.
Hers is not an uncommon experience for private investors engaging with the CGT regime. Onerous, baffling and unfit for purpose, the rules are in desperate need of updating and reform.
Changes to CGT allowances in last year’s Autumn Statement not only missed opportunities to solve these problems, but will force millions more taxpayers to grapple with them. The annual tax-free allowance is to be cut from £12,300 to £6,000 from April, and halved again to just £3,000 from April 2024. The reduction of the threshold makes changes to CGT even more urgent.
CGT will produce £15.3bn for the Treasury coffers in 2022-23, according to the latest estimates by the Office for Budget Responsibility. Only a small part of this — less than 5 per cent by my estimates — comes from investors in shares in quoted companies and funds.
Many individual investors have large amounts of deferred capital gains tax liabilities through their investments. Government should remove the friction that inhibits them from selling individual shares where they have substantial capital gains.
This would increase turnover, improve the efficiency of capital allocation by individuals, and bolster the money available for investment in new business opportunities and companies that will stimulate growth in the UK economy.
The complexity Sue faced on a forced sale due to Cobham’s takeover is one example of a creaking, burdensome set of tax rules. Many investors will find that in future they need to keep detailed spreadsheets to ensure accurate record keeping as they are drawn into the CGT net.
A member of ShareSoc, a group representing the interests of individual shareholders, bought and sold various units in the L&G UK Index Trust between 2003 and 2020. Complications arose from multiple sales and purchases, equalisation, switching to a different lower-cost unit class, and a change in the CGT calculation rules in 2008. He created a spreadsheet to track his CGT liability in the trust — and found it ran to 127 rows.
Another problem is the base cost. For assets owned before 1982, investors must take the market value at March 31 1982 as the “base year” when calculating CGT. Keeping records that go that far back is challenging — and particularly difficult for executors of those who have died.
These historic valuations are also not typically captured by investment platforms. When Sue transferred her Cobham shares from one investment platform to another in 2012, the receiving platform showed the cost of the shares at the time of the transfer and not at the base cost date or original purchase date.
The tax rules require her to record the inherited price in 1985 (after the base year), the price in 2004, the price of the rights issues she took up; and ignore the price at the date of transfer to any platform. Since the platform is likely to supply HM Revenue & Customs only with data from its available records, she will be left to argue with the authority that the platform data is incorrect.
What is the solution? First, the government should consider a new rollover relief to encourage individual shareholders to sell shares with capital gains and reinvest in UK growth companies, creating jobs and future wealth.
Currently, individuals with a portfolio of shares have to pay CGT on any shares they sell at a profit. This is mitigated by the ability to offset gains against losses and the personal CGT allowance.
The system, however, creates a tax bias in favour of investing via collective funds and penalises direct share investment. Owners of unit trusts, investment trusts and OEICs pay no CGT when managers buy and sell shares within the fund. A new rollover relief would allow CGT to be similarly deferred until invested capital is withdrawn and spent.
HMRC should also consider another measure: allowing gains from existing investments to be crystallised at a reduced rate of tax if they are reinvested. This could increase tax revenues in the short term. If the government wishes to pull forward tax receipts on capital gains, it can use this type of mechanism.
Reducing the CGT threshold to £3,000 increases the burden for taxpayers and will affect many who are far from wealthy. We need investment capital to be recycled, to invest in the UK to create jobs and future prosperity for all. In the meantime, we should all make full use of our Sipps and the annual £20,000 Isa allowance.
Cliff Weight is a director of ShareSoc, which represents and campaigns on behalf of individual investors
The tax tail often ends up wagging the investment dog.
This distortion of what to invest in, when to sell, and keeping sometimes hideously complicated records wastes time that could be more productively employed by the onvestor and drags in paying specialists to calculate tax, often to no real purpose, because either the records are lacking or wrong, or the tax to pay is nil or minute, especially in comparison with the fees charged.
Why, for example, should one be virtually forced to invest for CGT reasons in a gold ETF within an ISA instead of directly in ingots held in a vault, which is cheaper on big holdings but worse for CGT?
Why should CGT be charged on inflationary gains caused by government QE policy, which are outside the control of the individual taxpayer?
It would be far better to cancel CGT (and IHT) and increase very marginally the VAT and income tax rates to cover the shortfall. Or better still, reduce the burden of government on the economy by removing from government control anything where it is not essential for government to be involved.