Sir Keir Starmer warned that the upcoming Budget will be a painful one - how can business owners prepare for this?
The Prime Minister’s warning that the upcoming Budget on 30 October will be a painful one comes hot on the heels of Rachel Reeves’ announcement that there is a £22billion “black hole” in public finances. Despite the new Chancellor’s previous pledge to lead “the most pro-growth Treasury” in UK history, when she indicated that there were ‘no plans’ to align capital gains tax (CGT) rates with income tax rates, it is widely speculated CGT rates will rise.
Both Starmer and Reeves have reaffirmed Labour’s election manifesto that national insurance, income tax and VAT will not be increased, which leaves the question of where Labour plan to implement revenue-raising measures in addition to their well publicised proposals to hike taxes for oil and gas producers, add VAT to private school fees and means test winter fuel payments.
Potential avenues to shore up public finances include the reduction of pension tax reliefs, changes to inheritance tax and stamp duty land tax reforms, but possible capital gains tax changes have proved to be the subject of much speculation in the market, leading to reports of taxpayers seeking to sell assets in advance of any rates increase.
Business owners undoubtedly face a period of uncertainty and in this article we will highlight some options and strategies that could be used to minimise the impact of any capital gains tax changes.
The current position
- Lower rates and annual exemption
Higher or additional rate taxpayers currently pay 20% on gains from chargeable assets. Chargeable assets include property that’s not your main home, your main home if you’ve let it out, used it for business or it’s very large, any shares that are not in an ISA or personal equity plan (PEP), business assets, and personal possessions of more than £6,000 (apart from your car).
The 20% rate has been in place since 2016 and can be offset by an annual exemption of £3,000.
The annual exemption has been reduced by over 75% from the £12,300 it was in the 2022-2023 tax year.
- Reliefs
There are several reliefs available on the sale of business assets, including business asset disposal relief (BADR), formerly known as entrepreneurs’ relief. BADR reduces CGT to 10% for the sale of ‘personal businesses’, including the sale of sole trader or partnership business and shares in a company where an employee or director has held at least 5% shares and voting rights in the company for the previous two years.
There are also reliefs available on the exchange of shares for other shares or securities and on incorporation of a business into a company. These operate to relieve the CGT gain at the point of the exchange or incorporation and instead the CGT trigger event is the later disposal of shares or securities acquired on exchange or incorporation.
What might the new regime look like?
- Increase in rates
There has been speculation in the market that CGT rates could be aligned with income tax rates, with studies estimating this could raise up to £16bn annually while. However, £16 billion is almost certainly an overestimate and does not factor in investor behaviour. A CGT rate of 45% would be the highest in Europe and could drive wealth creators and entrepreneurs out of the United Kingdom, which is certainly something the Chancellor will wish to avoid.
- Reduction in annual exemption
The government has not explicitly stated that the annual exemption would remain fixed. Even removing this completely would unlikely have huge fiscal impact but is not off the table.
- Scrapping BADR?
The lifetime cap on this relief was slashed significantly, from £10million to £1million, in 2020. With Labour’s pro business stance, it is perhaps unlikely that the Treasury will scrap BADR entirely, but if CGT rates are increased it is likely that the 10% will also be increased.
What can business owners do now?
- To sell or not to sell?
In very simple terms, the only way to be certain to lock in current CGT rates would be to sell assets in advance of the budget on 30 October. CGT is also triggered by entering into an unconditional contract, but any attempts to do so where, in reality, the contract is not truly unconditional are likely to be caught by anti-avoidance provisions. Any sales which allow or could allow assets to be reacquired later are also likely to be caught by anti-avoidance provisions.
Where business owners have carried forward capital losses which could be used to relieve any gains, it may make sense to delay using the losses so they are later relieved against gains at a higher rate of CGT (rather than using them now to offset against gains chargeable at 20% or 10%).
- Review recent share disposals and reorganisations - consider accelerating the tax point
If business owners have previously sold assets or been the subject of a reorganisation, CGT reliefs may have applied to delay the CGT tax point. In certain circumstances, it is possible to disapply the relief and trigger a disposal, which can allow the business owner to take advantage of the current CGT rates.
Where shares are sold in exchange for other shares or securities, in circumstances where BADR could have applied, it is possible to, by election, override the share for share exchange rules which delay a CGT charge until a future disposal. This disapplication will mean that a CGT disposal was triggered on the past exchange of the shares and must be made by 31 January following the end of the tax year of disposal.
Where a sole trader or partnership has been incorporated into a company, incorporation relief applies automatically to delay a CGT disposal of the assets until a disposal of the company, but it is possible, by election, to disapply the relief. This can generally be done by the second anniversary of the 31 January following the tax year of incorporation.
It may continue to be possible to disapply reliefs following the Budget announcement 30 October if they fall within the prescribed time periods noted above, but the Budget could prevent this and so business owners may choose to disapply reliefs to accelerate the tax point now.
- Review succession plans – transfer to trusts or family investment companies
There are several tax-efficient succession routes for businesses, including the sale of a company to an employee ownership trust (EOT) or the incorporation of a family investment company. EOTs offer full CGT relief for shareholders on the sale of a company (or part of a company) to an EOT, provided certain conditions are met.
Where there are succession plans for a business, it may be efficient from a CGT perspective for business owners to implement those succession plans in advance of 30 October.
- Consider incorporating a sole trader or partnership into a company now
A sole trader or partnership may consider incorporating their business into a limited liability company in advance of 30 October. Incorporation relief applies to exempt the transfer into the company but this can be disapplied, by election, to trigger a CGT disposal now. As noted above, the election must generally be made by the second anniversary of the 31 January following the tax year of incorporation.
It is important to consider all tax implications of incorporation to avoid any unexpected liabilities, as there is no relief from SDLT or LBTT for the transfer of property on incorporation.
- Utilise
CGT annual allowance CGT annual allowance has already been reduced to £3,000. Individuals could utilise this by making disposals before any potential further allowance reduction. It is also possible to transfer assets to a spouse on a tax-free basis, which can allow them to also utilise their own £3,000 annual exemption.
Risks and pitfalls
- CGT is only one consideration
Any business decision, including a decision on the timing of the sale of a business or an asset, or any succession planning, should be made in light of all commercial factors and not just CGT. There may be an increase in CGT rates after 30 October, but holding a business or asset for longer may yield a higher overall return rather than a sale earlier than planned.
Any decision driven by CGT alone is unlikely to be the correct one for a business and, depending on the circumstances, could be considered tax avoidance. Any share, business or asset disposal must be a genuine one and this has commercial and risk implications for business owners.
- Funding a “dry” tax charge
CGT is generally payable where there are proceeds which can be used to pay the tax. Reliefs are available on incorporation and on share exchanges or reorganisations to prevent “dry” tax charges arising. If reliefs are disapplied, then a business owner will have to fund this tax charge with no proceeds of sale to pay them with. Business owners should ensure that they have the funds to pay any CGT, plus any other tax or associated costs, which arise on any actions taken in advance of the October Budget.
To get further details about the next steps, please contact Christine Yuill at Christine.Yuill@burnesspaull.com.
