In the last week, the Office of Tax Simplification (OTS) has reported back to the Chancellor regarding a potential shake- up of the Capital Gains Tax (CGT) regime. If its recommendations are implemented (which is highly likely, given the need to repair the country’s finances), it will be the biggest change to CGT in 30 years.
If you are a business owner, particularly one with an eye on exit and succession, then the time to act is now.
What are the headline recommendations?
In its report, the OTS makes 11 recommendations. Included within those wide-ranging suggestions for reform of CGT are the following key extracts:
- “consider… aligning Capital Gains Tax rates with Income Tax rates.”
- “consider whether employees and owner-managers’ rewards from personal labour… are treated consistently.”
- “the Annual Exempt Amount… consider reducing its level.”
- “consider removing the Capital Gains uplift on death.”
- “consider replacing Business asset Disposal Relief [i.e. what we used to call “Entrepreneurs’ Relief] with a relief more focused on retirement.”
There are other recommendations within the OTS report which offer some potential mitigations of these very significant proposals, but it is crystal clear that the combination of the OTS’ views together with the Chancellor’s known instincts, will lead to a major shift (upwards) in CGT.
When these recommendations translate in to statute (which genuinely could be the case by April 6, 2021, or very soon after) owners can expect to see a material loss of net capital value, by reason of increased tax on future realisation (or other disposal) of their business interests.
Why should I act now?
We have been providing early warnings of this shake-up since July, to encourage clients to take advantage of the current 10% and 20% CGT rates whilst they are still available.
We are now four months further down the line. Is it too late to take action? In broad terms, no – where the conditions are right, early action could still be very beneficial. Whilst it may not be possible to accelerate a business sale in the next four months, there are alternative options such as succession of client businesses to family members, to trusts for family members, to management personnel OR sales to Employee Ownership Trusts (see Tax Tuesday – “Selling to an Employee Ownership Trust”). These are all options that we are currently advising clients on.
Succession provides an opportunity for a controlled “exit” at a price which falls to be taxed under the favourable CGT code, even if/when the monies to pay for that exit might come out of profits over future years. For more on this – see Tax Tuesday “Succession: Do not let CGT ‘disappear’ before realising your exit value”.
The CGT increase will also affect companies looking to incentivise key employees through EMI share option schemes. If this is something you are contemplating, then we recommend putting it into place in the current tax year, as it is highly likely that existing EMI share option schemes will be protected. For more on EMI, see Tax Tuesday “Enterprise Management Incentives”.
We strongly advise not to underestimate the likely impact of the law changes that are coming. They will raise billions of pounds of additional taxation every year after implementation, and nearly all of that will be paid by a small population of businessmen and women.
How can we help?
We are geared up to help owners lock in the benefits of the existing CGT regime, while it lasts.
If you would like to explore the possibility for, and significant advantages (which go beyond taxation) associated with a succession plan, for design and implementation in the near future, please contact Tax Partner Chris Barrington.