We reported in our August newsletter that The Chancellor has called for a review of Capital Gains Tax (“CGT”), as he looks to claw back recent Covid 19 support spending. The Chancellor has asked the Office for Tax Simplification, ("OTS") to look at whether the current rates are “fit for purpose”. It has prompted speculation that he will look to bring CGT in line with higher rates of Income Tax, given that it is mainly paid by those in this bracket. We have long stated that the normal rate of Capital Gains Tax (20% for non-residential property assets), is too low, and the Covid-19 pandemic Government spending provides the backdrop for increasing the rates.
In a letter to the OTS, Mr Sunak says: “I would like this review to identify and offer advice about opportunities to simplify the taxation of chargeable gains, to ensure the system is fit for purpose and makes the experience of those who interact with it as smooth as possible, as set out in the agreed terms of reference.” The review is also to put forward suggestions regarding allowances, exemptions, reliefs and the treatment of losses within CGT, and the interactions of how gains are taxed compared to other types of income.
Over the August bank holiday weekend, we saw the newspapers reporting they had “received information”, “been advised”, or simply speculating on tax increases, which included CGT. Statements (apparently from Government) include, “why should an individual who owns and sits on a commercial property pay less tax (20%), than someone who goes out to work.”
Currently, we understand the following tax increases / reliefs are being considered:
- Corporation Tax rate to increase from 19% to 24% - This Government stopped the already legislated reduction to 17% (originally announced by Philip Hammond) so this could be “on the cards”. However, is it too early for businesses who are recovering from the pandemic and then having to deal with leaving the EU? How many companies will make a profit on which to pay tax this financial year?
- Income Tax increases across all bands of 1% and/or a freezing of the personal allowance.
- National Insurance increases for the self-employed. The Chancellor all but confirmed in announcing the self-employment income support scheme, that self-employed taxation is to be reviewed and to address the perception that self-employed people pay less tax.
- Capital Gains Tax – as mentioned above, a potential rate increase, or could it be abolished? See below.
- Inheritance Tax – it is rumoured that The Treasury is looking at life time gifts which are tax exempt if the donor survives seven years, considering either an allowance on the maximum level of gifts that can be made, or a gift tax, which many other countries have.
- Pensions tax relief raises its head again, and it is reported that The Treasury has resurrected work undertaken during George Osborne’s time as Chancellor regarding a fixed level of pension relief, say 20%, for all taxpayers. As we all know, this raises its head every Budget but never happens, as politicians are nervous about measures discouraging individuals saving for their retirement. Is this the year?
- Abolishing the triple lock for state pension (the Government’s pledge that the state pension will rise by the greater of 2.5%, average earnings growth or inflation).
A Conservative Chancellor (Nigel Lawson) looked at abolishing CGT before and aligning it with income tax back in the 80s. The plan was aborted, believed to be due to it being highly unpopular with the party, but also it being difficult to implement. Changing CGT would raise funds, but not a great deal, with two thirds of UK tax revenue coming from Income Tax, National Insurance and VAT. It is also not that straightforward; it is easy to target the commercial landlords with the message given above, however what about the business owner who has spent years building the business, the sale of which is their retirement fund, or the employee receiving proceeds on shares earned under the tax efficient Enterprise Management Incentive Scheme, set up so they benefit from CGT not income tax, as a reward for service.
The Chancellor has already attacked CGT is his March Budget this year, announcing significant restrictions on future availability of Entrepreneur's Relief (“ER”), now known as Business Asset Disposal Relief (“BADR”) for individuals who dispose of all or part of their business, individuals who dispose of shares in a trading company, and trustees who dispose of business assets.
Broadly, the changes increased the amount of tax payable by a business sold at a profit of over £1m, before any further changes are announced. Anything above £1m is currently taxed at 20%, how would business owners react if CGT is abolished and this gain is taxed at 45%?
The measures announced in March reduced the lifetime allowance (the amount of qualifying chargeable gain that can be taxed at 10%) from £10m to £1m. It also provides that the lifetime limit must take into account the value of ER claimed in respect of qualifying gains in the past since ER was introduced in 2008.
In summary, BADR is currently available in the following situations, where qualifying conditions are met.
Selling all or part of a business
To qualify for BADR, both of the following conditions must apply:
- the individual must be a sole trader or business partner; and
- the individual must have owned the business for at least two years before the date they sell it.
The same conditions apply if the business is closing rather than being sold. The business assets must be disposed of within three years to qualify for relief.
To qualify, the following conditions must apply for at least two years before the shares are sold:
- the individual must have more than 5% of the Company’s shares which have voting, dividend and capital rights on a winding up;
- the individual is an employee or office holder of the company (or one in the same group); and
- the company's main activities are trading (rather than non-trading activities like investment) or it is the holding company of a trading group.
It is an individual relief, therefore in respect of a married couple consideration can be given to spouses holding shares (provided they can be employed) or, in the case of an unincorporated business, becoming a partner.
With the risk of CGT rates increasing or being abolished, or BADR being abolished, action should be taken where possible to benefit from current reliefs and rates. However, we would flag that in changing the tax or increasing rates, The Treasury could introduce anti-forestalling measures (backdating changes), so as to capture transactions before the Budget date. This was seen in the March 2020 Budget with the changes to ER, which were backdated in certain circumstances to April 2019.
What can be done to beat any changes, if there are any:
- Where possible, take action and complete transactions at the earliest opportunity. With a booming property market, a number of buy-to-let landlords and second home owners are selling residential property (currently paying 28% CGT), however there is a backlog in transactions and the time to complete is being extended due to the pandemic recovery slowing down matters, so need to “push” transactions along.
- Can a transaction be created to benefit from the current CGT rates, for example:
- Personally owned commercial property sold to personal pension funds;
- Re-organisation of a company for a commercial reason, on which a CGT charge can be triggered (however this is likely to trigger a “dry” tax charge with no additional cash generated from the transaction, so a plan would be needed to fund the tax bill in January 2022);
- Business exit with delayed payment to, say, the management team. This brings with it some risks, as the business needs to survive to pay you;
- Exit company via a buy back of shares, which can be a capital transaction if certain conditions are met and a tax clearance obtained from HMRC;
- “Bed and breakfasting” quoted shareholdings ensuring sufficient gap between sale and re-purchase so as not to fall foul of the anti-avoidance rules;
- Accelerate a transfer of shares in a company to children or wider family, if this was already part of succession plans for passing on the business in the future; or
- Liquidating a solvent trading company that is no longer required and does not intend to trade again (targeted anti-avoidance tax rules need to be considered).
Advice needs to be taken and it is our view that actions should not be taken just to “chase the tax rate” unless you are confident consideration can be received in the future if deferred.
Should you wish to discuss your position and the possible risk of tax increases, please do not hesitate to contact us.
It's vital that everyone follows the guidelines & remember: