This week's opinion: 19 November 2020

The Office of Tax Simplification’s review of capital gains tax (tinyurl.com/otscgtfirst) has attracted a lot of publicity – given the negative tone of many headlines, more perhaps than the office expected. For more detail on the report see Mark Pickard’s article on page 8, but one thing really struck me. 

The table on page 64 of the report and reproduced as Chart A in Mark’s article, shows reported gains for 2017-18 (the last year for which data is available) from zero to £15,000. Naïvely, one might have expected this to show an even spread of gains across all amounts, but it does not. The graph is flat save for a massive spike at just over £11,000. Anyone who did not know about the tax system would think this was an aberration, but there is an explanation. That year the capital gains tax annual exemption was £11,300 and the graph shows the extent to which taxpayers, largely those with investment portfolios, triggered gains up to the annual exemption to rebase their holdings. This is standard planning advice, but I have wondered whether many people followed it: this graph shows that they do. 

This is a good example of how behaviours are influenced by the structure of tax system – there is another example on page 59 which is also worth looking at. There is nothing wrong with that, but it does make predicting the effect of change very difficult. If the annual exemption were reduced to £10,000 would that bring all of these gains of around £11,000 into tax? No. People would then rebase by reference to the new limit and nothing more would be collected. At the next major policy announcement look at the small print to see whether behavioural change has been taken into account.