Are More Tax Increases on the Horizon?
The Government have already announced one tax increase from April 2022 in the form of what will eventually be called the “health & social care levy”.
The Chancellor is due to present his autumn budget to Parliament on 27 October 2021 & speculation is rife that further tax increases may be announced. In particular, commentators have been predicting that Capital Gains Tax (CGT) is likely to be increased & or reformed.
This would follow in the footsteps of President Biden, who has set out plans to nearly double CGT for wealthy Americans.
The Office for Tax Simplification carried out a review of the CGT system in July 2020 & stated that, in their opinion, the CGT system could be made simpler and fairer by:
- Reducing the CGT annual exempt amount
- Aligning CGT rates more closely to income tax rates
- Removing the “CGT uplift” on inherited assets
- Reassessing existing CGT reliefs
All these suggestions are likely to be bad news for taxpayers.
The CGT tax-free allowance is currently £12,300 for individuals, which means that gains up to this amount are exempt from CGT each year. If this was to be reduced, people with relatively small gains could be brought into the charge to tax.
Income tax rates are generally a lot higher than CGT rates.
Loss of the “CGT uplift” on inherited assets could be hugely costly for some individuals. Currently, an individual that inherits an asset & then goes on to sell it for a profit is subject to CGT. The taxable amount is based on the difference between the sale proceeds & the value of the asset when it was inherited, as opposed to the original price the deceased bought it for. This “CGT uplift” can significantly reduce the amount of CGT payable.
There are several valuable CGT reliefs. The lifetime limit for Business Asset Disposal Relief (BADR), which was previously called Entrepreneurs’ Relief, has already been reduced from £10m to £1m & it’s possible that this could be reduced again, or the qualifying criteria could be tightened up. It’s even possible that this relief could be removed altogether.
Although this is all currently speculation, it is likely that future CGT reforms will erode some of the upsides of entrepreneurship.
Business owners who are looking at exit strategies now may wish to accelerate their plans in anticipation of CGT reform.
The current CGT rules allow various methods tax-efficient exit for a business owner. A straightforward unincorporated business sale or a sale of shares in a trading company will hopefully qualify for BADR if the vendor has their lifetime limit available.
Another option for exiting a business & generating a capital receipt is via the members’ voluntary (solvent) liquidation process. The distributions made during the liquidation process, being distributions of capital, will be taxed at CGT rates & again, subject to eligibility, qualify for BADR. There are some complex anti-avoidance rules that exist & we can advise further on this point if this is something you are considering for your company.
More & more business owners are making use of an employee ownership trust (EOT).
EOTs enable an owner’s controlling interest in a company to be sold to a trust for the benefit of the employees. If all of the statutory conditions are met, the sale will be fully exempt from CGT & the employees can benefit from tax-free bonuses.
The most well-known example of this ownership structure is John Lewis, but more & more business owners are seeing the benefits of this powerful tool to not only provide them with a tax efficient exit strategy but also to incentivise & retain their staff.
We have helped several businesses make the transition to employee ownership & we would be happy to explore this option with you if you think this might work for your business.
There is more information available here: https://www.mitchellsaccountants.co.uk/the-benefits-of-the-employee-ownership-model/