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Office of Tax Simplification publishes report on CGT

The Office of Tax Simplification’s recently published report on capital gains tax (CGT) hit the headlines as the OTS’s key recommendations for reform could potentially result in significant increases in the payment of tax on capital gains.

The recommendations set out in the report (which is the first of two to be published by OTS following a review into CGT ordered by the chancellor) include:

  • greater alignment between CGT and income tax rates;
  • revisiting the boundary between capital and income gains with certain gains (including share-based rewards from employment) being brought within the income tax regime;
  • lowering the tax free CGT allowance,
  • removing the capital gains uplift on death; and
  • cancelling or reforming some valuable reliefs like Business Asset Disposal Relief (formerly Entrepreneurs Relief).

If all of these steps were implemented by the government, it would be a significant overhaul of the CGT regime in the UK and could potentially have a dramatic effect on the level of tax due when businesses are sold. It’s worth noting this is currently at discussion stages only – this is simply a report by an independent advisor to the government and there is no guarantee their recommendations will be implemented – but following on from changes to Entrepreneurs Relief last year, it is a clear signal of intent from the chancellor who is faced with the prospect of trying to recoup some of the covid-19 related spending by the Government.

Whilst this may simply have been a way for the chancellor to test the appetite in the market for change and the likelihood of some of the more radical suggestions being implemented is low, most commentators expect that CGT rates will  rise in the new year. That change would impact anyone looking to dispose of any assets, but would be a particular blow to business owners looking to realise the value of their hard work through an exit. Following the reduction of the maximum relief available under Business Asset Disposal Relief in last year’s budget from £10m to £1m, if any gain above this limit was now taxed at 45% rather than 20%, the impact would massive.

So what should you do if you are considering a sale, or advising others who might be? One obvious option is to push through a sale now, to take advantage of the current tax rates and reliefs before they change. That might be practicable if negotiations are already well advanced, but with an uncertain economy due to the impacts of covid-19 and Brexit, this may not be the best time to rush to market. Instead, it’s worth giving some thought to alternative means of minimising any adverse change to the rules. This could mean crystallising gain through family succession planning utilising trusts, or by taking advantage of tax-exempt disposal rules on the sale of a business to an employee ownership trust. We are also seeing a range of insurance policies coming to the market to cover off the CGT risk, so there are options out there. Time does not appear to be on our side though, with announcements expected early next year, so the sooner owners start considering their options and planning for any changes, the better.

By Eoin Broderick
Posted in: Business