Following the first of two reports due to be issued by the Office of Tax Simplification (OTS), there is mounting speculation about the future rate of Capital Gains Tax (CGT) in advance of the Chancellor’s next Budget announcement. After the cancelling of the autumn Budget, the date for the 2021 Budget has yet to be set but treasury officials have hinted that it will take place in March. Amid much lobbying, there is no certainty of what will actually happen, but many fear that sooner or later taxes will have to rise to begin to recoup the historic spending sanctioned by Rishi Sunak in the name of public health and jobs.
Although the timing may be uncertain, in our view there are income tax rises in the offing for many of the 28 million employed and 4.7 million self-employed. Those with broad shoulders and assets such as entrepreneurs and the higher paid cannot reasonably expect to escape these rises and the 265,000 individuals who actually pay CGT may also suffer from ‘virtue signalling’ which could easily see CGT rates also rise. There are already signs that some are looking to accelerate disposals before April 2021 to take advantage of the current ‘20% with reliefs’ regime. Those who cannot complete a disposal within this time frame may want to consider their position and look at potential ways to protect their current entitlement to tax relief.
Entrepreneurs’ Relief, previously a generous 10% on £10million of lifetime gains, has been greatly curtailed this year and renamed to Business Asset Disposal Relief (BADR) such that now only £1 million of lifetime gain qualifies for the 10% rate. Gains above this on most business assets are currently taxed to 20% and it is this element which critics have really set their sights on with the OTS arguing that this rate should be effectively aligned with the top rate of income tax – currently 45%. The OTS has also called for the abolishment of Investors’ Relief, which provides a 10% rate on certain gains made by external investors with a more generous lifetime allowance of up to £10m. This relief was only introduced 6 April 2016 for newly issued shares, and required a holding period of 3 years.
If you are worried about CGT rises or are hoping to benefit from BADR or Investors’ relief in the near future, (or if the relief might form a key part of your exit strategy), you may want to consider bringing forward any business sales currently underway to a date before April 2021. If you are liquidating your business, you may want to rationalise your affairs now in order to secure liquidation receipts before the Budget announcement. Those who choose this latter route need to be mindful of the anti-phoenix provisions which, in effect, treat liquidation receipts as normal dividends (subject to tax at 38.1% rather than the 10%/20% regime for capital gains) where the owner has not fully retired but becomes involved in a same or similar business within two years of the liquidation receipt.
The date of disposal for CGT purposes is normally the date that unconditional contracts are entered into, not the date the transaction is completed. When Entrepreneurs’ Relief was scrapped and BADR introduced, there were provisions which disturbed this principle to frustrate the plans of many of those who wished to exchange ‘early’ in an attempt to stay out of the new regime and keep their tax bills low.
We expect that any radical reset of CGT rates will also come with similarly targeted anti-forestalling measures making life very difficult for those disposal transactions underway but not completed when the date of change draws near. Unlike previous occasions when significant capital reliefs have been withdrawn or curtailed, there now remain comparatively few ways to “bank” the relief. Those techniques that do remain could result in potentially unpalatable ‘dry’ tax charges. Where a commercial pressure is brought to bear, ways may be found to reach a timely completion at almost any cost but for each of these there will be a range of other factors to consider including a potentially unfavourable Inheritance Tax analysis. However in suitable circumstances, completing the transaction to preserve the relief may deliver a potentially higher post-tax receipt compared to allowing the transaction to slide into the new regime.
This year has seen a steady interest in disposals to Employee Ownership Trusts which can be achieved at a nil tax cost, with capital payments over the medium term paid from cash flow. It remains to be seen whether under this model, the acquiring Trustees are successful in running the businesses to pay off all those who have exited but for those where the timing is right and the required value has been achieved it remains one possible exit scenario, at least for the time being. For those whose companies have some growing yet to do, the maxim that the tax tail should not be allowed to wag the commercial dog applies - rather than rush for an early exit, the better choice is probably to hunker down, work on business growth and seek to create value.