Whispers of possible changes to capital gains tax (CGT) began in early July when Rishi Sunak commissioned the independent Office of Tax Simplification to investigate how CGT is paid by individuals and smaller businesses.
This review has been coupled with the fact that, over the last 6 months, we have seen enormous spending by the Government in order to tackle the economic pressures Covid-19 has placed on the UK. It therefore now seems to be more of an open secret, than a whisper, that bold tax changes may be implemented this Autumn with CGT, along with many other taxes, in line for reform.
How does CGT work?
In summary, CGT is a tax on the gain or profit made when selling an asset. The “taxable gain” is that part of the gain which exceeds your personal annual CGT allowance of £12,300 (providing you have not already used this up).
The rate at which you pay CGT is linked to the rate of income tax you pay and also the type of asset which has been disposed of. There are currently 5 rates for individuals: 0, 10, 18, 20 or 28%. Companies selling assets also pay a flat rate of 19% corporation tax on capital gains.
There are a number of available CGT exemptions, but the most significant and well known is Business Asset Disposal (BAD) Relief, or Entrepreneurs Relief as it is was known until March of this year. This provides an effective tax rate of 10% on the first £1 million of lifetime gains (which also meet various conditions) made on or after 11 March 2020 from the sale of qualifying business assets, including qualifying shareholdings in private companies.
What are the concerns for CGT?
Concerns are focused on the possibility that CGT rates may be brought in line with income tax rates. The most significant impact, if this does happen, would be for those who sit in the higher and additional rate income tax bands (which are currently 40% and 45%). By contrast, the current higher CGT rates are 20% and 28%. This difference between income tax rates and CGT rates has generally led to people focusing on generating capital gains rather than income, and in turn reducing their tax liability.
What options are available to those who might be affected?
First and foremost, because of the uncertainty, those who are concerned about possible changes to CGT could seek to sell the assets before the budget. However, this brings its own pressures, in that you might not be ready to sell and, simply put, there might not be enough time to get a sale completed on sensible terms.
BHW has also seen an uptick of interest in Employee Ownership Trusts (EOTs) since the talks of changes to CGT began. EOTs essentially allow business owners to sell their shares to a trust which acts in the interest and benefit of the employees – the company is effectively sold to itself. Consideration is generally paid out over a deferred period and the transaction can be tailored to incorporate exit plans for specific individuals, bringing in new management and providing incentivisation for all employees. The most important benefit of EOTs for sellers is that they come with significant tax incentives if created correctly, and are looked on favourably by HMRC.
There is a real chance that the Autumn budget may be delayed until April next year if there is a serious “second spike” in Covid-19 cases. If this does happen, we will probably get an outline summary of proposed tax changes to take effect in 2021 when (hopefully) the economic outlook is more certain. This would, of course, allow more time to explore avenues for tax mitigation. If the budget does go ahead this Autumn, it is likely to be in either late October or November.
It may be the case that the rumours of changes to CGT amount to nothing, but with such significant Government spending at the moment it is difficult to see how considerable changes to the taxation system won’t be needed in the near future.
If you wish to discuss the options available to you in the lead up to the budget or wish to receive further information on EOTs please don’t hesitate to contact Ed Nurse on 0116 281 6230 or at Ed.Nurse@bhwsolicitors.com.