Taxpayers, who have undertaken a share exchange in relation to their trading company and may benefit from an election to crystallise the tax now, should read on.

With only a month before the forthcoming Budget on 3 March, owners are braced for potentially significant changes to the Capital Gains Tax regime, which could impact both trading and investment gains, and which might involve knock-on variations of the tax code that are difficult to anticipate. Tax Tuesday sincerely hopes that Mr Sunak will retreat from any major tax-raising initiatives at this time, taking the view that it is surely still too soon to begin asking anyone to start paying for the (undeniably huge) public sector costs of the pandemic. The 3 March does, nevertheless, focus our tax planning minds.

Share exchanges generally

Taxpayers who have “swapped” shares in a former business, for other shares, securities, loan notes (et al), will no doubt be considering their position and pondering the risk that a previously predicted 20% tax charge (on a future gain arising from ultimate realisation of their ongoing stake) might double, or even worse, if the Chancellor decides to hit hard on this aspect and align CGT to marginal rate Income Tax. Some taxpayers have inevitably been considering their scope to accelerate taxable realisations and to lock-in the favourable rates at the current time.

Where BADR applies (that’s Entrepreneurs’ Relief to you and me!)

For those taxpayers who have swapped shares which were part of a sale potentially eligible for Business Asset Disposal Relief (BADR) on disposals since 5 April 2020, the tax code provides an election facility, under sections 169Q and 169R TCGA 1992 to have the “no disposal” reorganisation treatment (which they may have had cleared previously by HMRC), disapplied, such that the share swap is then treated as immediately taxable at the date of the transaction. By this means, the election seeks to ensure that tax under the current regime is applied to the value obtained at that time (albeit value “in kind”, of course, not cash, unfortunately). Ultimate realisations of the new shares, securities, loan notes, will then be sheltered by the uplifted tax base cost of those assets, which base cost is duly increased to that value taxed at the date of the swap.

How much time do we have to think about an election?

Affected taxpayers may be aware that the election in question needs to be submitted by the 31 January following the year of the transaction. Accordingly, any share exchanges which have taken place in this fiscal year 2020/21 have a further full 12 months during which the taxpayer can weigh up the merits of accelerating the tax and ensuring that current rates, and not higher rates, are suffered. The decision to proceed with an election is not just about tax rates, of course – there are likely to be serious questions to consider regarding cash availability (paying the tax on shares, securities, loan notes is a “dry” and uncomfortable charge), and regarding the risk of non-recoverability of some or all of the ongoing stake (such that paying tax on that as well would be adding insult to injury!).

Look out for “anti-forestalling”

Having said all the above, Tax Tuesday raises a potentially important thought on this before affected taxpayers decide to sit on their hands and “wait and see” what the Budget brings:

Last year, as many will recall, another significant change was made to the CGT regime; the lifetime gain eligible for the 10% rate of tax (formerly ER, now BADR, as noted above), was slashed from £10m to just £1m per taxpayer. Alongside that significant change came some anti-avoidance legislation seeking to counter the tax planning industry’s attempts to manage the situation. It focused, in particular, upon these elections to accelerate the tax-point, if desirable, to a date prior to the Budget in which the new law was announced (11 March 2020, in that instance).

It is perfectly possible that, in addition to any changes which are made on 3 March 2021, similar so-called “anti-forestalling” measures are adopted. Taxpayers need to be careful that “innocent” situations are not caught by such anti-forestalling measures. The practical impact of those measures, last year, was that for an affected share swap, the date of the election became the tax-point for the transaction, meaning that some (possibly many) anticipated elections after the Budget Day became ineffective in accessing the prior rates.

Recommendations

Tax Tuesday’s recommendations for potentially affected taxpayers:

  • they should acquaint themselves with the features of the 2020 “anti-forestalling” measures, in case these might be reproduced again this time; but
  • if those taxpayers are already clear that they will want to make the section 169Q or R election, they might be advised to make that before 3 March and avoid any question whatsoever that anti-avoidance measures could catch it.

If you are potentially affected by a share swap under which BADR might have applied and would like to consider your options, please do get in touch with Chris Barrington, Tax Partner, to discuss.

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