A review of the capital gains tax (CGT) regime by the Office of Tax Simplification (OTS) has failed to acknowledge how CGT affects unrepresented taxpayers, according to the Low Incomes Tax Reform Group (LITRG).

The group indicated it is particularly disappointed with the failure by the OTS to acknowledge the role of the Annual Exempt Amount (AEA) in preventing inadvertent non-compliance by anyone unaware that they might have a CGT liability.

Taxpayers who have chargeable gains falling within their AEA – £12,300 for 2020/21 – do not have to pay any CGT and generally are not required to register to file a Self Assessment tax return if they do not already file one.

This means that unrepresented taxpayers who make a chargeable disposal without realising it – which the LITRG highlighted is most often on the disposal of a property which has at some point been the taxpayer’s only or main residence – are protected from falling foul of compliance obligations where the amount of the chargeable gain is small.

While the OTS report does not recommend that the government should reduce the AEA without first considering what its purpose should be, the LITRG said it is concerned that any reduction will bring more unrepresented taxpayers into scope of the CGT regime.

HMRC data has previously suggested that a reduction of the AEA to £2,000 would bring more than 250,000 taxpayers into the Self Assessment regime.

LITRG head, Victoria Todd, commented: “The OTS say that if the AEA is to be reduced, other exemptions should be reviewed – but it does not consider the case where an individual disposes of a property which has not been their only or main residence throughout the entire period of ownership.

“This is concerning, given that recent changes to private residence relief, such as the reduction of the final period of ownership which qualifies automatically for relief, relied on the fact that the AEA at its current level would give unrepresented taxpayers some protection from accidental non-reporting.

“The AEA is crucial in preventing unrepresented taxpayers falling into this trap – and its level is a sensible one in the context of selling property. We would urge the government not to reduce it – or otherwise fully consider how they might mitigate the issues for unrepresented taxpayers which would be created.”

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