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Relief as Capital Gains Tax hike shelved, and  good news for divorcing couples

tax

The Treasury issued a letter to the Office of Tax Simplification yesterday, outlining that it wouldn’t be reforming CGT or IHT along the lines of its recommendations, but will make some small technical CGT tweaks: FINAL_FST_response_to_OTS.pdf (publishing.service.gov.uk)

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown comments on the update as follows: 

“It’s a huge relief to see Capital Gains Tax reform proposals shelved, because while the tax is in dire need of simplification, doing it by ramping up the rates would have caused more problems than it solved. The dropping of planned changes to Inheritance Tax also avoids introducing yet more complications, but this was a real missed opportunity to reform gifting limits, which are no longer fit for purpose.

There would have been huge unintended consequences of the proposed CGT changes, because people would have been artificially trapped holding assets they didn’t want – because the tax benefits of hanging onto them until they died would have been too good to lose. This would mean, for example, buy-to-let investors refusing to part with properties they don’t really want in an effort to avoid CGT, while first time buyers struggle to get on to the property ladder.

There’s a very welcome tweak to the rules for divorcing couples though. At the moment, if your divorce crosses into a new tax year, then any assets that you pass between you as a result of the divorce could be subject to CGT. This tweak will mean this is no longer the case, so couples won’t be forced to time proceedings quite so ruthlessly, rush decisions through, or pay the price for delay.

IHT missed opportunity

It’s really disappointing that the Treasury hasn’t taken this opportunity to update the gifting allowances, which are no longer fit for purpose. The £3,000 annual exemption has been frozen since 1981. If it had risen with inflation it would be over £13,000 now. The small gifts exemption has been frozen since 1980, so after inflation it should be over £1,000. And the wedding gift exemptions haven’t changed since 1975 – and were always a slightly peculiar oddity anyway.

Reducing the length of time it takes for larger gifts to leave the estate from seven to five years was also eminently sensible, as the current system requires too much record keeping, and forward planning. And getting rid of the loophole that means gifts made 14 years ago could end up dragged back into the estate would have avoided some horrible surprises.”

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