The Office of Tax Simplification (OTS) paper published earlier this week sets out 11 recommendations to simplify Capital Gains Tax (CGT). While not entirely unexpected, it’s fair to say they would not be good news for UK business owners.
The key message from the OTS is that the current rate difference between income tax and CGT needs narrowing as this difference ‘distorts behaviour’, encouraging taxpayers to seek out capital gains rather than income.
Here’s a brief summary of the proposed changes to CGT:
- Doubling the main rate of CGT to 40%
- Abolishing Investors’ Relief and updating Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) to benefit individuals who are retiring
- Taxing share-based rewards to income tax rather than CGT (we’re hopeful this won’t affect long-standing schemes such as EMI)
- Removing the capital gains base cost uplift on your death, meaning CGT is paid by beneficiaries if the asset is disposed of (although there is talk of rebasing assets to their value in 2000 if originally purchased earlier)
- For shareholders of smaller owner-managed companies, subject some or all accumulated retained earnings to income tax on a sale or liquidation
- Reducing the CGT annual exemption (currently £12,300) to £4,000 or less and moving to a ‘real-time’ CGT system.
Only time will tell whether the Treasury act on any of the recommendations – indeed history tells us this is regularly not the case. It’s also fair to say that major reforms to CGT would be a political minefield in the current climate. Rishi needs to raise tax revenue soon, without alienating Tory voters… a tough ask!
WHAT CAN YOU DO?
We wouldn’t expect all changes to come at once, however initial reforms could start creeping in early next year – we consider March 2021 a real possibility.
If you’re thinking of selling your business (whether to PE, management, trade or an employee trust), think about bringing this forward. There’s still time and we’re here to help.
Where a sale is not on the horizon, there may also be opportunities to lock in current tax rates aligned to your business or personal asset succession strategy.
if you have an investment portfolio (or other assets) with significant capital gains, consider crystallising those gains now.
LOOKING TO DISCUSS YOUR OPTIONS?
Speak to your usual tax contact or send your questions over to me at firstname.lastname@example.org
Steve Round | Transaction Tax Director