CAPITAL GAINS TAX CHANGES COULD IMPACT BUSINESS OWNERS
Chancellor may renew focus on the tax to help foot the COVID-19 bill
In July 2020 the Chancellor Rishi Sunak asked the Office of Tax Simplification (OTS) to review Capital Gains Tax (CGT). At the end of last year, the OTS delivered the first of two reports on the tax, replete with recommendations for how to simplify the administration of CGT while increasing its yield for HMRC.
Which proposals from the report could affect business owners?
Alignment of Capital Gains Tax and Income Tax rates
One of the main recommendations from the report was the closer alignment of CGT rates with Income Tax rates.
Currently, basic-rate taxpayers pay 10% CGT on assets and 18% on property, while higher-rate taxpayers are charged 20% on assets and 28% on property. These rates are considerably lower than Income Tax, which is charged at rates of 20%, 40% and 45%.
Although no decisions have yet been taken, a worst-case scenario for additional-rate tax paying entrepreneurs could see some of those who currently qualify for Business Asset Disposal Relief facing a CGT rise from 10% to 45%.
With the March Budget on the horizon, it’s important that you begin careful tax planning to ensure you don’t pay more tax than is necessary should changes be made. There are a variety of measures you can take, from changing your remuneration strategy to a partial sale. But a strategy tailored to your needs requires expert advice.
Simon Martin, Regional Technical Manager at St. James's Place, says: “Currently, if you sell a business for £1 million, as long as it qualifies for Business Asset Disposal Relief you pay a maximum £100,000 in CGT. But if you’re an additional rate taxpayer and CGT is aligned with Income Tax, you’d pay £450,000, so it could be a significant increase.”
Slashing the exemption
The OTS suggested reducing the annual CGT exemption from £12,300 (in the 2020-21 tax year) to around £5,000, and has recommended abolishing Business Asset Disposal Relief and Investors’ Relief, which it says are not working as an incentive for investment.
If you are planning for a business exit in the near-term, ensuring you qualify for Business Asset Disposal Relief will help limit your CGT liability. If you’re close to a sale, getting the deal done before any CGT changes would also be prudent.
If you’re planning to continue your business for the medium to long-term, CGT changes alone may not push you to dramatically change your exit timescales. However, planning your pension contributions and an efficient remuneration strategy can optimise your CGT position by extracting capital from the business over time.
It’s also important to ensure that you have a tax-efficient remuneration structure within your company. This involves more than simply taking the maximum £50,000 a year in dividends to stay within the 7.5% tax bracket. You could, for example, give your spouse a 50% shareholding so that he/she can also withdraw dividends at the lower tax rate and help to reduce your CGT liability over time. Maximising your pension contribution is also a useful way of removing capital from your business.
More fundamental approaches could include simply holding on to your business and growing it further to limit the impact of any tax charge. A share buy-back could also form part of your strategy but this is highly specialised tax planning and you would need expert advice. Alternatively, you could consider a partial sale that could see you taking some money from the business at the current CGT rate and planning longer term for the rest.
Nigel Fox, an adviser at business growth consultants Elephants Child says: “There’s always a middle ground. Do you sell 25% of your business today, take some money off the table, accept the tax that you pay and continue to build either as an executive or just as a shareholder? Ultimately, when you come to retire, you sell the rest, accept that there is some tax to pay but you might have been able to put in some inheritance tax planning or structure around trusts that will minimise it at that point.”
The report considers the overlap between CGT and Inheritance Tax, and suggests that where a relief or exemption from Inheritance Tax applies, the government should consider removing the capital gains uplift on death. This would mean that the person inheriting the asset is treated as acquiring the assets at the historic base cost of the person who has died.
A St. James's Place Partner will be able to help you develop an overarching financial plan that encompasses both your personal and business assets. Taking advantage of your annual CGT exemption could play an important part in limiting your overall CGT liability, and your St. James's Place Partner could help you use your dividend and savings allowances.
“How you plan your taxes is entirely down to your personal circumstances, your personal risk appetite, your situation in life and what you want to do,” says Nigel. “What I would say is the devil is in the detail.”
If you would like help with tax planning, talk to Orestone Wealth today.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.
Exit strategies may include the referral to a service that is separate and distinct to those offered by Orestone Wealth Management Ltd.
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The opinions expressed by third parties are their own and not necessarily shared by Orestone Wealth Management or St. James's Place Wealth Management.