When the Chancellor asked the Office for Tax Simplification (OTS) to review capital gains tax last summer (2020), there was a view that this was a valuable insight into his thinking on the future of CGT. The OTS published first part of its review in November in which it proposed a number of adjustments both to simplify the tax and to minimise the distortion of tax payer behaviour which, the government believes, the current system encourages.
Despite a widespread assumption that this review was a mark of the chancellor’s intention to introduce CGT reforms in the March budget, no changes were announced. However, given the parlous state of the UK’s finances most people believe that this is just a temporary stay of execution and that changes to CGT will be announced in the Autumn statement.
CGT could align with income tax
The OTS noted that 265,000 individuals paid £8.3bn CGT in 2017/18 but also made the point that, in the same year, 50,000 people reported net gains just within the annual exemption allowance. This was presented as evidence that the relatively high threshold of £12,300 ‘distorted investment decisions’. As a result, the two principal areas on which the OTS focused were the alignment of income tax and CGT rates and the reduction of the exemption allowance, both of which would affect business owners. If CGT rates were aligned with income tax, a business owner and higher rate tax payer would pay 40% capital gains rather than 20% (ignoring any current Business Asset Disposal Relief – formerly known as Entrepreneurs’ Relief) thus doubling the amount of tax they owed if they sold the business.
It is clear that in any tax reform exercise, there are always going to be winners and losers. The OTS review referred to the differing opinions held by previous Chancellors on the treatment of income and gains, with some taking the view that ‘there was little economic difference between income and gains’ (Nigel Lawson), and others that the ‘capital taxation system should better…reward risk taking and promote enterprise.’ (Gordon Brown). It is probably most likely that the current Chancellor’s position is being dictated by sheer economic necessity rather than ideology given that the Conservative manifesto promised no changes to CGT – but that was a different era.
If you’re planning to sell, consider your options now
So, if you are a business owner, what should you be doing? If you have been considering selling the business, then now would be a good time to go through your options. If the Chancellor does decide to change CGT rates and / or the exemption allowance this Autumn, it is possible that those changes could come into force immediately so the sooner you start to think about your future plans, the better. Many of the business owners and entrepreneurs with whom we work have reinvested their profits to secure the long term future of their business on the basis that they will be able to reap their rewards on the eventual sale. The likely CGT changes, if realised, have the potential to radically alter any financial plans if predicated on the current rates.
Of course, the pandemic will have altered the plans of business owners, many of whom will be or have been in survival mode. Nonetheless, there are opportunities for both sellers and buyers, particularly as the economy starts to emerge cautiously from lockdown. So, if you are thinking about selling your business then now is a good time to start preparing. Carrying out a due diligence exercise, taking into account your order book, property commitments, cashflow, assets and investments etc, will not only put you in a good position from a buyer’s perspective but will also help to clarify your thoughts about the future of your business.