Capital Gains Tax (‘CGT’) – what now?

In his Budget in March 2020 Mr Sunak announced further changes to CGT Entrepreneurs’ Relief (‘ER’).

The most material change was a reduction in the lifetime allowance from £10 million to £1 million. One further change, for reasons completely lost on me, was the renaming of the relief which is now called Business Asset Disposal Relief (‘BADR’). We must not forget that these changes were the latest in a number which have been introduced to limit the availability of ER/BADR.

CGTMr Sunak seemingly bowed to pressure from those suggesting that the relief was benefiting the wealthy. Statistics were presented at the time which stated that most business disposals created capital gains of less than £1 million. I for one did not believe this statistic. I recent years I have never dealt with a disposal when the gain subject to ER was less than £1 million.

The March changes suggests to me that BADR may have a limited life on the statute book.

The writing on the wall has become a little brighter with the announcement of a review of CGT by the Office of Tax Simplification (‘OTS’).

There will be a call for evidence with the potential for multiple OTS reports on the team’s findings. There is a deadline of 12 October for the second, more detailed, round of evidence. Thus, it may be some time before any recommendations are enacted.

However, business owners need to keep a close eye on developments.

I have repeatedly called for a simplification of our tax regime which is the most voluminous in the developed world. It would be good to think that this review will lead to some simplification – I am not holding my breath!

The OTS review will identify, and offer advice on, the technical and administrative issues affecting individuals, partnerships, owner-managed companies, as well as areas where the present rules can distort behaviours or do not meet the policy intention.

The review will consider:

  • The overall scope and rates of tax;
  • Reliefs, exemptions and allowances;
  • The annual exempt amount and its interactions with other reliefs
  • The position of unincorporated businesses and small companies, including the setting up, selling or winding up of such businesses or companies;
  • Any distortions to taxpayers’ personal or business investment decisions; and
  • Interactions with other parts of the tax system.

The review will focus on smaller businesses and individuals – it will not address large company issues. It will also look at more specific administrative and/or technical issues.

The OTS will consult widely, both in the UK and overseas, ever mindful of the need for fairness and efficiency in the tax system and the effect that the operation of the tax system has on taxpayers.

Whilst the review may herald simplification of the CGT rules, I fear that we may see further restrictions to, or even abolition of, reliefs such as BADR.

In my view, this would be an unwelcome move as many business owners see the lower CGT rate of 10% as an incentive to build a business thus encouraging entrepreneurship – which was after all the main aim of the relief.

The small business owner is under tax pressure on several fronts: potential changes to BADR, the reduction in the dividend allowance, the off-payroll working rules which have been delayed until next year.

In my view the OMB sector would welcome a little relief from the seemingly endless tax onslaught.

If you are a business owner, and a potential threat to BADR materialises from the OTS review, you should consider your options:

  • What are your successions plans: MBO, trade sale, liquidation? Can they be advanced?;
  • Examine the ways in which a gain could be crystallised to ‘bank’ the lower rate of tax;
  • Does your business structure offer other advantages which could be lost with the above planning?; and
  • Be mindful of potential anti-forestalling rules.

I strongly urge business owners to monitor progress of the OTS review. A little attention now could save tax in the long run. As with any such planning, care is needed and proper advice should be sought. Please get in touch for further guidance.

Simon Littlejohns
SLJ Accountants Limited
17 July 2020