Tag: Office of Tax Simplification

Interest Rate Sanity and Chancellor’s Announcements

The Bank of England’s announcement of an increase in base rate to 2.25% was just one step in a return to sanity. With inflation nearing 10% why would any idiot lend money at 5% or less as many mortgage providers have been doing. In reality the last few years have seen lower interest rates than have been available for the last 5,000 years.

This has been possible because of Quantitative Easing (QE) to keep the economy afloat. A misguided policy that has resulted in horrendous side effects. It has resulted in property price bubbles and stock market bubbles. When you can borrow money at 2% and use it to buy houses which have been rising in price at 8% or more (as they have done in 2022), people will buy houses as an investment – and the bigger the better. This is one key reason why house prices have been rising to levels that make them unaffordable to those not yet on the bandwagon.

Yes it will mean the cost of mortgages will rise thus making some people poorer for a while. But it is a necessary step to return the UK economy to a rational position.

It is still some distance from enabling savings rates to return to a situation where savers can obtain a real return. This has encouraged speculation in alternative investments that might promise a higher return. This was one reason why small cap AIM shares have been popular in the last few years. But that bubble is now bursting – the AIM index is down 31% so far this year.

In summary, I welcome the rise in bank rate and it should preferably go further to match inflation rates or more.

Chancellor’s Announcements

Kwasi Kwarteng has today announced a number of things including tax cuts.

The 45% top rate of income tax is scrapped and base rate reduced by 1% earlier than planned. The planned increase in National Insurance is scrapped and stamp duty reduced, while the planned increase in Corporation Tax is also cancelled.

The chancellor confirmed that the scheme to protect households and businesses from rising energy prices is expected to cost £60bn for the first six months. With the aforementioned tax cuts, the resulting likely increase in Government debt has caused a sharp drop in the price of gilts (and rise in their yield).  

It has also meant a falling pound which will not help the cost of living but will help exporting companies and those with revenues in dollars. By making imports more expensive it should stimulate UK production – for example of food and make us less reliant on imports.

A surprise announcement is the winding down of the Office of Tax Simplification (OTS) and revision of the IR35 rules. These are sensible moves as the OTS has been totally ineffective in simplifying the tax system which is horribly complex while IR35 rules have been incomprehensible and impractical to apply in the real world without adding massively to bureaucracy.

More reforms to planning laws are promised to stimulate infrastructure building and aid the Government’s growth agenda but we have heard that before. Unfortunately planners just love complex regulations as they generate work for planners and there will be resistance from nimbies so I expect this will see major objections and delays.

There will be new anti-strike laws for essential services and there will be encouragement for 120,000 people on universal credit benefits to “take active steps to take more active work or face having their benefits reduced” (the number of inactive people in the workforce has been rising while jobs go unfilled).

In summary, my personal opinion is that that these are positive moves on the whole. In the short-term, we might all be poorer but some of these reforms were well overdue.  

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Capital Gains Tax Review – Is It Simplification?

The Office of Tax Simplification (OTS) have published a second report on Capital Gains Tax covering practical, administrative and technical issues. They give a number of recommendations to the Government and I cover those that may affect individual investors below (at least the few who actually pay capital gains tax) and add a few comments:

  • HMRC should integrate the different ways of reporting and paying Capital Gains Tax into the Single Customer Account, making it a central hub for reporting and storing Capital Gains Tax data (recommendation 1).
  • The government should consider whether Capital Gains Tax should be paid at the time the cash is received in situations where proceeds are deferred, such as on the sale of a business or land, while preserving eligibility to existing reliefs (recommendation 8). This is a sensible change.
  • The government should consider whether individuals holding the same share or unit in more than one portfolio should be treated as holding them in separate pools (recommendation 4). They say “This will relieve the relatively small number of individuals with more than one investment manager from having to perform calculations based on the interpretation of a complex range of financial statements and help to facilitate better use of third-party data”. But it could mean that losses in one portfolio could not be used to offset profits in another. This writer would not be in favour of such a change (I have multiple portfolios with different brokers for good reasons). Any such change should be made optional, although it might not make a lot of difference for most people in practice. However, with other recommendations included it might enable tax to be collected much sooner than at present. Is there a hidden agenda here? One can envisage that Pay as You Earn might become Pay as You Trade.
  • There are currently several different ways UK resident individuals report Capital Gains Tax transactions to HMRC. In some cases, this involves disposals being reported more than once. The most common way to report a disposal is through Self Assessment. The next most common way to report a gain is via the UK Property tax return. A very small minority of people choose to report gains early through the ‘real time’ Capital Gains Tax service. The proposed change is that the government should formalise the administrative arrangements for the ‘real time’ Capital Gains Tax service, effectively making it into a standalone Capital Gains Tax return that is usable by agents (recommendation 2).
  • The government should review the rules for enterprise investment schemes, with a view to ensuring that procedural or administrative issues do not prevent their practical operation (recommendation 10).
  • The government should consider whether gains or losses on foreign assets should be calculated in the relevant foreign currency and then converted into sterling (recommendation 11).
  • HMRC should improve their guidance in the following specific areas (recommendation 14) – A persistent theme running through many of the responses the OTS has received to the Call for Evidence is that many people have limited awareness or understanding of Capital Gains Tax, of when it may arise, or of their reporting and paying obligations where it does.

The report is 121 pages long, but simplification is complex is it not? There are some proposed changes that are certainly advantageous (such as the extension of time for divorcing couples to transfer assets), and no doubt there are others that are rational, but this is not a wholesale simplification of the system of Capital Gains Tax that is preferably required. It’s just tinkering with the complexity to removal a few anomalies.

The OTS report is available from here: https://www.gov.uk/government/publications/ots-capital-gains-tax-review-simplifying-practical-technical-and-administrative-issues . If you think you might be affected by these proposals it’s best to read the whole report.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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More on the Capital Gains Tax Review

I commented briefly yesterday on the Review of Capital Gains Tax by the Office of Tax Simplification (OTS)  – see https://roliscon.blog/2020/11/12/capital-gains-tax-review-a-missed-opportunity/ where I called it a “missed opportunity” to substantially reform the tax.

The more one looks at their proposals the more some of them appear to become absolutely bizarre. For example I mentioned the proposal that the rebasing of an asset to the current value when it is inherited should be removed – in effect the new owner would have the original cost retained.

This has two implications. Firstly it means that the full value of the same asset is taxed twice – once in IHT when it is inherited, and again when the inheritor subsequently disposes of it in capital gains tax. At least at present, the inheritor only pays tax on the growth in value during their ownership. But if the latter tax is based on the original value rather than the last inheritance, it could go back very many years in time. This is what Tim Stovold of Moore Kingston Smith said in the FT on this issue: “If this change should become law, capital gains could accrue across multiple generations making assets unsaleable due to the astronomical tax liability — a liability that could come home to roost if they were ever sold”.

The second issue with this is that in practical terms it means that an inheritor would need to know not just the value of the asset as fixed by probate, but the value when originally acquired by the deceased. This could be an impossible task because past records are rarely kept with such accuracy and longevity.

The FT published a good article under the headline “What does CGT review mean for investors” where it pointed out other problems with the review’s proposals and quoted a number of people giving negative comments.

One can only conclude that if the Government pushes ahead with these proposals, that one should rearrange one’s financial affairs to hide as much as possible in ISAs and SIPPs, or buy big houses to live in (not subject to CGT) and not invest in company shares or your own businesses. Or alternatively avoid accumulating assets and spend the cash before you die. This surely makes no sense in policy terms!

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Inheritance Tax Simplification – Perhaps

On Friday (5th July) the Office of Tax Simplification (OTS) published their second report on the simplification of Inheritance Tax (IHT). You only need to read the report to see how complex it is at present. They have made some recommendations for changes but they are relatively minor. Major changes were ruled out. Even the suggested changes need to be accepted by the Treasury so they may not be implemented, and even if they are it appears likely that they would not happen quickly. These are some of the key proposals:

  • Exemptions for gifts might be simplified. For example, the exemption for “normal expenditure out of income” is unclear in effect and requires detail record keeping for many years which few people are capable of doing. They suggest it be replaced with a higher personal gift allowance. Tip: keep a spreadsheet of all income and expenditure (including gifts) if you are making personal gifts at present.
  • The 7-year period after which gifts are free from IHT also creates problems in record keeping (even bank statements are not retrievable after 6 years), particularly as it can extend to 14 years. Taper relief is another complication. The proposal is to scrap taper relief and have a simple 5-year rule for exemption.
  • The residence nil-rate band introduced a lot of complications in IHT calculations and received a lot of negative comments but they don’t propose to remove or simplify this area as they say it’s still relatively new and more time is required to evaluate its effectiveness. But it says some solicitors choose not to advise clients about this concession because it is so complicated!
  • They propose no change to the provision that reduces the IHT tax rate on all assets to 36% if a person leaves more than 10% of their estate to charity despite the fact that it is little used. Note: this is a very useful facility so if you have a will that does not include such a provision then you need to review it because it can reduce your overall IHT bill.
  • Business property relief, particularly on “unlisted” AIM shares, was considered in the review. It questions whether third party investors in AIM traded shares meet the “policy objective” of Business Property Relief (BPR). But it makes no specific recommendation other than noting that removing APR (Agricultural Property Relief) and BPR would fund a reduction in the main rate of IHT to 33.7% from 40%. However it does point out the anomalies in determining whether a business is trading or is just an investment vehicle and in non-controlling shareholdings held indirectly. It suggests this be reviewed.

Is there a threat to IHT relief on AIM shares? It is not clear that there is and certainly not in any short-term time frame. In any case, investing in AIM shares simply because they offer IHT relief is a bad policy. Investment should never be driven by tax considerations. In addition the requirement to hold them for 2 years makes for dubious trading decisions and the complexity in record keeping if one trades in the shares of AIM companies can be mind-boggling.

In summary the proposed changes, even if HM Treasury supports them, are not going to simplify IHT that much. You will still need to take expert advice on this area of your financial affairs and tax accountants will not be put out of work. There is no revolution proposed.

You can read the OTS report here: https://tinyurl.com/y65jubxz

Or read my original comments on what should have been done here: https://roliscon.blog/2018/05/31/inheritance-tax-review/

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Savings Income Tax Review

In addition to the review of Inheritance Tax previously covered, the Office of Tax Simplification (OTS) are also undertaking a review of ways to simplify the taxation of income from interest on savings and dividends. Although 95% of the population pay no tax on such income as they have relatively little, the complexities of calculating the tax due on those with higher levels are mind boggling. Here’s a couple of quotations from the OTS Report (see https://www.gov.uk/government/publications/simplifying-the-taxation-of-savings-income ) which explain why:

“Many of the issues have arisen because of a series of changes, each working well enough taken by itself but which together create significant complexity that is not easily resolved”; and:

“The starting rate for savings (SRS), personal savings allowance (PSA), dividend allowance and other allowances and features of the tax system mean that most people pay no tax on their savings, but the interactions between the rates and allowances is sufficiently complex at the margins that HMRC’s self-assessment computer software has sometimes failed to get it right. It is proving to be very difficult to create an algorithm that calculates the tax correctly in all circumstances and HMRC does not expect to bring the complete calculation online until 2018-19.”

For those with complex tax affairs, or significant levels of dividend income who are probably some of the readers of this blog, this is not a trivial problem. Even my large firm of accountants who do my personal tax returns seem to be having problems with the software they use of late. I would certainly hate to try and do my own tax returns now.

One of the past simplifications which has been very damaging to stock market investors was the introduction of a “dividend allowance” of £2,000 to replace the dividend tax credit system. Although investors can put money into an ISA where dividends are not taxed (and could be paid out), there are severe limits on the amounts that can be invested in an ISA. That limit is £20,000 in the current tax year but has been much lower in the past and may get reduced again. For those shareholdings not in an ISA or SIPP, the removal of the dividend tax credit system means that the Government is collecting tax twice on the same company profits. Once when corporation tax is paid by the company and again when dividends are paid to investors out of those profits. This is surely iniquitous even with the current relatively low level of corporation tax. This change was allegedly made to prevent small incorporated businesses from avoiding income tax by paying profits out via dividends instead of via salaries subject to PAYE, but there were other simple rule changes that could have prevented that.

What does the OTS propose to do to simplify the calculation of savings tax? They wish to introduce a “personal tax roadmap” incorporating a plan for consolidation of the savings income tax rates and allowance. Also they wish to improve guidance because it is clear that people have difficulty in understanding the existing system. More flexibility in ISAs might also be considered to allow partial transfers of money and simplify the rules.

One specific threat in the document is this: “A more radical option would be to end the differential tax rates for dividend income. If all taxable income was taxed at the same rates, it would not matter how the personal allowance was used. Making this change would have the effect of increasing the amount of tax due from those who receive amounts of dividend income above the allowance. It would also impact on the taxation of profit extracted as a salary or as a dividend, from family owned companies.”

Investors receiving substantial dividends directly have already suffered a major tax increase from the removal of the tax credit system (the £2,000 tax free allowance is trivial in comparison with the income likely receivable by a portfolio large enough to fund a retirement for example). The new suggestion that dividends should be taxed the same as earned income would be another damaging imposition (the former are currently taxed at somewhat lower rates, although Trust rates are higher – another anomaly that is difficult to explain).

You can send your own comments to the OTS via email to: ots@ots.gsi.gov.uk .

As I said in the Inheritance Tax Review you might suggest to them that the present arrangements seem to generate work for tax accountants while baffling the general public. Like IHT, income tax is certainly a tax that requires simplification. A more fundamental review is surely required. However it’s worth bearing in mind that individuals have often planned their financial affairs based on existing tax rules. Abrupt changes to tax rules and allowance should be avoided, but that’s all we have had for the past few years, driven by political imperatives. The result has been the unintended consequence of a very complex tax system that few people understand and which makes tax calculations only possible by experts.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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