Is The CGT Clock Ticking?
With the 2021/22 tax year budget having been delayed to March 2021, business owners, investors and landlords have a narrow opportunity to plan in anticipation of potentially material tax hikes.
One tax that seems likely to be towards the front of the tax reform queue is CGT which has a modest rate of taxation of 10% (18% for residential property) for basic rate tax payers and those that qualify for Business Asset Disposal Relief (see below) and 20% (28% for residential property) for higher/additional rate tax payers.
The Office of Tax Simplification recently issued a report recommending material changes to CGT. This coupled with changes to Entrepreneurs’ Relief that have already targeted business owners, including a rebranding of the relief to BAD Relief (Business Asset Disposal Relief), perhaps foreshadows the future direction of government policy towards capital gains taxation.
It is not only the CGT rates that are at risk of changing, the CGT annual exemption (gains that can be made tax free) could also be materially reduced. Making full use of the 2020/21 annual exemption could therefore also be advisable if this is in line with your overall commercial/investment strategy.
So what should business owners be considering? Given that this will be planning based on speculation, care needs to be taken not to let the ‘tax tail’ wag the ‘commercial dog’. Notwithstanding this, things to consider as part of your overall strategy to mitigate the effect, should material changes to CGT rates and reliefs occur, could include:
- If you are in a business sale process, or contemplating a business sale, ensure this occurs before the March 2021 budget, as that may be when any new rules take effect.
- If you have a company that is due to wind-up, ensure this is done prior to the next budget.
- If no sale is contemplated currently, then consider the general ownership structure of your business. Depending on your longer-term intentions, crystallising CGT now at lower tax rates could save tax in the long run. This could be achieved for example by giving adult children equity stakes in the business either direct or through trusts.
Business sales to crystallise capital gains do not have to take the form of third-party disposals, other options that could be considered are:
- Management buyouts.
- Sales to Employee Ownership Trusts, which can normally be done completely free of CGT!
Investors should review their investment portfolio and consider if it would be appropriate to realise any capital gains prior to the March 2021 budget (when the changes are likely to take effect) to lock in the current CGT rates (10%/20% depending on if you are a basic or higher rate taxpayer), or to make use of the CGT annual exemption.
Special rules apply to share and similar disposals where the investments are bought back shortly after they are sold but planning can often be possible to avoid such rules applying, so please consult us if planning of this nature is to be undertaken.
Commercial investment consideration also needs to be considered for which our IFA arm can assist with if you do not already have an investment advisor.
If you are in the process of disposing of a property, completing the sale prior to the March 2021 budget may be advisable.
If a sale is not contemplated, consideration of the ownership structure of the property may be beneficial in the long term. For example, gifting children a share of a property prior to the March 2021 budget could reduce the long-term tax payable, although an advancement of tax would likely arise (even if gifted without consideration).
For each of the above asset types disposals can be made to trusts to crystalise CGT at the current rates if sale/outright gifts are not desirable. Trusts are more complex structures than direct ownership but can provide a number of tax and/or commercial benefits depending on the specific circumstances.