The Office of Tax Simplification (“OTS”) earlier this month recommended Capital Gains Tax be more closely aligned with income tax, meaning additional rate tax payers could pay tax up to 45% on any capital gain, compared with the current rate of 20%. The OTS report also recommended reducing or even removing altogether the annual exemption of £12,300. If adopted, these proposals would obviously significantly reduce net proceeds received by owner-directors and others on the sale of their business.
While the chancellor is scrambling to raise money to fill the fiscal hole left by the Covid-19 crisis, he will want to think hard before following the OTS recommendation; far-reaching reforms of Capital Gains Tax would hit many voters and Rishi Sunak may feel the estimated maximum £14bn tax receipts would not make a big enough hole in the £246bn (and growing) total debt to justify the risk he would take by making the tax increase. Business owners have already been hit by a hefty cut earlier this year in Entrepreneurs’ Relief, now called “business assets disposal relief”, when the lifetime allowance was reduced from £10m to £1m.
That said, many believe it is only a matter of time until income and capital gains taxes are aligned. There is no indication as yet, though, as to when the Chancellor might implement such tax changes and the Treasury insists, “The government’s priority right now is supporting jobs and the economy”. The OTS report was the first of two and focused on policy design and principles underpinning the tax. The second will look at key technical and administrative issues and is due to be published next year. The Chancellor is likely to await the second report before acting but that could still leave room for Capital Gains Tax changes in the Spring budget. Sometimes unpopular taxes are implemented immediately. On other occasions they are signposted for a later date.
With a full sale process taking 6-9 months and a fast-tracked process less, there may or may not be time for business owners to sell before they have to pay up to an extra 25% or more tax on their proceeds. In any event, business owners contemplating the sale of their business would do well to bring these proposed changes in Capital Gains Tax into their thinking.
If you would like to talk through your options, please do get in touch.