When representations were sought on the reform of capital gains tax for individuals, the government didn’t say what it had in mind, and there was no follow-up consultation.
It is hardly surprising, then, that the measures about to be incorporated in the Finance Act, particularly the tapering rules, leave a lot to be desired.
I fear that this time next year I will be making the same criticism of the reform of CGT for companies. The deadline for these representations passed at the end of June, and we have not been told of any plans to consult.
So we may effectively be faced with another fait accompli in the December Green Budget. To avoid a repeat of the unfortunate consequences for individuals, it is up to us to continue to keep the issues live and show our concern.
In this column a couple of months ago, I set out the dire consequences that could follow if, for companies, indexation is replaced by tapering in the same way as for individuals. In particular, tapering fails to give full relief where there are roll-overs (and might therefore put transfers within a group at risk) and has capricious results for losses.
Aside from this, I have set out below a number of ways in which the current system works unfairly and which my firm, in its representations, would like to see addressed.
Unused CGT losses should be capable of being carried back as well as forward. At present, you can be caught out by an accident of timing. Sell asset A at a loss in year 1 and asset B at a profit in year 2 and you’re alright. Do the reverse and you’re in schtuck.
Roll-over relief should be available on shares in trading companies, not just on trading assets. This would remove an unnecessary impediment to the natural form of many commercial transactions, since it is currently necessary for assets to be sold instead of shares.
Enhancement expenditure needs to be reflected in the state or nature of an asset when it is sold if it is to qualify for CGT relief. This can operate unfairly.
For instance, a landlord may put in fixed partitioning prior to installing a tenant. Later, he rips it out and puts in new, improved partitioning for a new tenant. The capital expenditure on the original partitioning will not be allowed for CGT when the property is sold because it is no longer there.
CGT gains and losses should be allowed to be matched within a group, like group relief. At present, sales have to be routed through group companies to obtain the same effect, which is unnecessarily complicated. It is also potentially expensive: arriving at a suitable transfer price could have company law implications requiring legal advice. For leases, landlords and tenants may have to be notified and their consent given.
Assets caught in a trap
When a company leaves a group, it can be caught in a nasty trap. If it holds an asset which has been transferred to it by another group company within the previous six years, a CGT charge crystallises on the asset at the point of departure, not when the asset is sold. This is easy to overlook and difficult to avoid. It would be more appropriate to exempt bona fide commercial transactions so that only avoidance would be caught.
A weakness of CGT is that, where you have tiers of subsidiaries, the tax cascades. For instance, take a group that, for historical reasons, consists of Holdings which owns all the shares of Trading, and someone wants to buy Trading without being burdened by the superstructure of Holdings.
There are two levels of CGT to be borne: by Holdings on selling Trading, and by the ultimate shareholders on the liquidation of Holdings.
A similar problem arises when Holdings owns, say, three trading subsidiaries.
Predator wants one of the trading subsidiaries but only the shares in Holdings are on offer. Despite the fact that Predator has paid #1m for Holdings, the shares in unwanted subsidiaries which it sells off often have a historic cost of, say, a mere #1,000. The #1m cannot be apportioned to the subsidiaries.
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