Capital Gains Tax: how will the business landscape respond to change?

Jonathan ThorntonPartner, Quantuma

Ian Barton, managing director at Quantuma, discusses the potential changes to capital gains tax, and how owner managers may need to accelerate exit plans to avoid expected rises.

Last month, the chancellor put business owners on notice by publishing his letter to the Office of Tax Simplification (OTS) where he asked the OTS to undertake a formal review of the Capital Gains Tax (CGT) system. The reason was simple: to ensure the system is ‘fit for purpose’, with a view to making it simpler and smoother for those interacting with it. 

While the pressure mounts for government to gather evidence and provide an update during the autumn budget, it is interesting to consider what the changes could mean for business and individuals. 

A change is coming

Concluding the few short paragraphs in his letter, the chancellor noted, “I would be interested in […] how gains are taxed compared to other types of income”. For business owners considering their retirement options, or realising value from the businesses they have built, these few words are potentially dynamite. 

While HM Treasury is backing this as standard practice to review, this is a fair warning siren that change is coming. Some have warned that a new approach to CGT could lead to a ‘tax grab’ later this year, with others highlighting that it would be naïve to think this wasn’t inevitable.  

Currently, Entrepreneurs’ Relief affords CGT rates at lower levels than income tax at 10 per cent for first £1 million of gains in your lifetime and 20 per cent for gains above this level, or at 18 per cent and 28 per cent where gains relate to residential property (other than your principal residence). The concern is, and alluded to in the letter to the OTS, that with the current economic environment being completely derailed by the Coronavirus outbreak, CGT will be hiked closer to income tax. In other words, a potential increase from 20 per cent CGT (after the first £1 million of gain) to 45 per cent.

In many respects, the chancellor has few levers to pull here given existing manifesto pledges regarding income-based taxes and VAT rates, but with spending during the pandemic at unprecedented levels, tax rises are inevitable for the near term. Whilst increasing CGT may not yield the largest windfall for HMTreasury, aligning income and capital rates produces an uplift in tax receipts, in addition to being seen as a simplification of the complex world of tax legislation.

Pushing for a sale

So if you are selling your business, come the autumn statement, your tax bill on disposal may more than double overnight. Therefore, businesses that have survived and even thrived during the first half of 2020, undertaking a disposal in the near term should be considering whether the value erosion caused by the pandemic could well be more than compensated for by savings achieved by acting before CGT changes. 

There are many active buyers out there. There is competition between them and they are making allowances for the fact that many businesses will bounce more quickly than in most recessions. They are focused on how businesses are coming out of lockdown and responding to the ‘new normal’, rather than what happened during it. 

While for vendors the headline price may now be lower than it would been in January, business owners may net more proceeds in their pocket by exiting now, rather than waiting for the world to ‘return to normal’ after this pandemic. 

Equally, the challenges of business over the last few months have exhausted many owner-managers who have started to think about a different future for the business, themselves and for their family.

Of course, there are no crystal balls here and the exact changes are yet to be announced. However, if they do go ahead as many predict, this has the potential to shift business owner’s mindsets if capital gains and income taxes align, which is hugely significant for entrepreneurs who have invested and grown their business over time. Whether or not a realisation was being considered in the near future, business owners would be well advised to at least consider their options now. 

Webinar: Employee Ownership Trusts: Efficient exits on an owner’s terms

Join us on Thursday, 24 September as Quantuma, Clarkslegal and Clydesdale Bank join forces to deliver a webinar explaining how to use EOTs as a mechanism to sell a business to its employees on the owners’ terms.

Adrian Howells, an expert from our corporate finance team, will be joined by Stuart Mullins from Clarkslegal and John Palmer from Clydesdale Bank to discuss the many advantages EOT has to offer when business owners are looking to sell.


Contributing Advisors

Mark LucasPartner, Quantuma

Andrew HoskingPartner, Quantuma