LITRG concerned about lack of awareness of capital gains tax allowance cut

The Low Incomes Tax Reform Group (LITRG) is concerned that today’s drastic reduction in the annual amount of capital gains which would be free from capital gains tax (CGT) may go unnoticed by some unrepresented taxpayers, which could lead to higher rates of non-compliance.¹ With HMRC figures suggesting that around 200,000 additional taxpayers will be required to file a Self Assessment tax return (and/or a 60-day property disposal return) as a result of the reduction,² LITRG is calling for HMRC to do more to raise awareness of the reduction.

LITRG also urges the government and HMRC to consider the Office of Tax Simplification’s (OTS) 2020 recommendation to reform exemptions and administrative requirements alongside any reduction in the CGT Annual Exempt Amount (AEA).³

In the Autumn Statement 2022, the Chancellor announced that the CGT AEA would be reduced from £12,300 to £6,000 for the 2023/24 tax year, instantly reversing 30 years of inflationary increases to the figure.⁴ The allowance is also scheduled to be reduced further to £3,000 from 2024/25 onwards.

The CGT AEA provides taxpayers with some protection from burdensome compliance obligations when the amount of tax at stake is relatively small. The reductions to the CGT AEA will reduce that protection.

As some of the taxpayers with new compliance obligations may be unable to afford to pay for professional advice, LITRG is concerned about increased non-compliance.

Although the £6,000 CGT AEA may seem generous in the context of unrepresented and/or lower-income taxpayers, there are some scenarios in which such taxpayers may become liable to pay CGT. One example is when a chargeable gain arises when selling a property which has not been a taxpayer’s only or main residence throughout the entire period of ownership.⁵

Given the historic upward movement in house prices, it is easy to see how a sizeable gain can arise. In such situations, a reduction in the AEA will also increase the number of taxpayers needing to file a CGT property disposal report within 60 days – an obligation which, in LITRG’s experience, is not widely appreciated.⁶

Tom Henderson, LITRG Technical Officer, said:

“We were disappointed that the government did not first publish a review of the purpose of the CGT AEA before reducing it.⁷ It is also unfortunate that the government has implemented the reduction in isolation, ignoring the OTS’s recommendation to reform certain exemptions and administrative requirements to help ease the impact of such a reduction.

“A general lack of awareness of the reduction might leave unrepresented taxpayers exposed to penalties and interest arising from inadvertent non-compliance. The position is made worse by the fact that capital gains tax policy development in recent years – from the April 2020 changes to main residence relief to HMRC’s thinking on cryptoassets – has relied in part on previously higher levels of the AEA.⁸

“We urge the government to do more to mitigate the impact on unrepresented taxpayers on the reduction of the AEA. At the very least, the low awareness must be addressed. But we also urge the government to consider the OTS’s recommendations to ease the impact of the changes when further considering CGT policy.”