The Office of Tax Simplification has called for Government reviews of inheritance tax and capital gains tax as part of its tax relief review.
In its final report on tax simplification, published last week, the OTS also suggests merging income tax and National Insurance, a long-term project it believes would deliver “major simplification”.
But the review does not recommend change for income tax relief on insurance bonds, including the 5 per cent rule and top-slicing relief.
The review started last November and focused on tax relief which the OTS believed had scope for simplification, including potentially exempt transfers for inheritance tax planning and IHT taper relief.
Capital gains tax and income tax relief for venture capital trusts and capital gains tax relief for enterprise investment schemes were included.
It looked at 27 IHT reliefs and says the reliefs are integral to the IHT regime but it has called for “a top-down” review of IHT, carried out by the Government or the OTS.
The OTS says the capital gains tax system for individuals and companies has “drifted apart”. It suggests a realignment of the treatments and a simplification of the tax is needed as “a longer-term project”.
It recommends that venture capital trusts and enterprise investment schemes should be simplified. It says the conditions for investors and the investee company should be rewritten in a simpler form to make it easier for taxpayers to determine eligibility.
It also says the Government should consider aligning the time limits and conditions of EIS and VCTs.
Of the 155 reliefs that the OTS looked at, it recommended that 47 should be abolished, including the contrac-ted-out rebate for occu- pational schemes and the exemption from CGT of compensation to people missold personal pensions. It suggests that 37 reliefs should be looked at in more detail, 54 should remain unchanged and 17 should be simplified.
Barnett Wallingham consultant Malcolm McLean says merging income tax and National Insurance would make the system simpler but the resulting higher tax bill might be a hard sell. He says: “Most people realise that NI is just another tax but merging the two would deliver a rate of tax that people would react against. Politically, it would not look good.”
Hargreaves Lansdown head of advice Danny Cox says removing the 5 per cent rule and top-slicing relief for insurance bonds would have destroyed the bond market.
He says: “The recommen- dation to retain these is a saviour for the investment bond market. Without them, inv- estment bonds would lose most of their shine.”