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Capital Gains Tax changes - What do business owners need to do to minimise the impact?

BDO LLP

Government spending has risen exponentially in recent months as a direct result of COVID-19 – totalling £250 billion and counting. Designed to manage the public purse during the global pandemic, it’s inevitable that the emergency borrowing will result in tax hikes further down the line.

While the November Budget may have been shelved to focus on the task in hand, there is a strong possibility that come 6 April 2021 we will see much anticipated tax rises that could have a significant impact on business owners. The signs are there for all to see and point to undoubted changes in several areas, including Capital Gains Tax (CGT).

An Office of Tax Simplification (OTS) review of CGT is already in motion, after the Chancellor of the Exchequer asked the independent adviser to carry out a review to identify simplification opportunities. Consultation is underway and will conclude on the 9 November, with the OTS urging individuals and businesses, as well as professional advisers and representative bodies, to voice their opinions about which aspects of Capital Gains Tax are particularly complex and hard to get right, and to hear any suggestions for improvements – covering the principles of CGT, the technical detail and practical operation. The scope of the OTS clearly includes the level at which the rate is currently set at.

Speculation is rife that Capital Gains Tax rates might rise to 40% for higher earners, from the current 10 - 20% rates. Not even the postponement of this year’s Autumn Budget will do much to quell those rumours.

Changes have already been made this year to the availability of Entrepreneurs’ Relief, which provides for a lower rate of CGT (10%) to be paid when disposing of all or part of a business where certain criteria are met, subject to a lifetime limit of qualifying gains. In March, that lifetime limit was reduced from £10 million to £1 million and renamed Business Assets Disposal Relief, affecting individuals who dispose of all or part of their business, as well as individuals who dispose of shares in their personal company and trustees who dispose of business assets. This measure is aimed at improving the effectiveness and value for money of Entrepreneurs’ Relief by reducing the lifetime limit on eligible gains. 

It’s clear that the Government is on a path towards CGT changes, including tax rates, so what do business owners need to do in order to minimise the impact?

  • Those who are planning share disposals/gifts may wish to accelerate their plan to benefit from the current relatively benign regime.
  • Those who have businesses with investment assets may wish to restructure if those activities are substantial.
  • If CGT rates rise significantly, owners of groups may prefer to sell subsidiaries tax free under the Substantial Shareholding Exemption rather than realise personal capital gains. If so, they should consider whether their current group structure would facilitate that. 
  • If sales of a majority stake to an Employee Ownership Trust remain tax free that will become an increasingly attractive option. 
  • Undoubtedly, significant CGT rises would encourage people to emigrate to lower tax regimes. Some of these are not the traditional ‘tax havens, as countries such as Spain, Portugal and Italy have all introduced very favourable tax regimes to encourage the wealthy to relocate there. However, living abroad is a major upheaval and not for everyone. Those looking to leave would need to consider what they’d need to do to shed UK residency and how long they would need to remain out of the UK tax system. 

The OTS review, and the clear need to raise taxes in the short to medium term, means that we are likely to see the biggest shake-up of capital taxes for a generation. The sooner businesses consider how possible changes might impact them the better. The writing is on the wall.

Paul Townson
Tax Partner
BDO LLP