Capital Gains Tax Reform

Published 27 July 2020

You may already know, but if not, you should be aware that the Treasury are considering a change to, indeed overhaul of, Capital Gains Tax (“CGT”). The rationale is that public expenditure has been increased dramatically to deal with Coronavirus and attention needs to be given to how that can now be paid for.

The biggest change likely to be made within the overhaul is the elimination of the final part of Entrepreneur’s Relief. Until March of this year, the threshold for the relief was up to £10m, but that was slashed to just £1m. This meant that £9m was suddenly (overnight) exposed to CGT giving an extra liability of £900,000 on all gains of £10m+.

You may feel that a tax charge of 20 per cent is not too bad but bear in mind one of primary groups caught by this is business owners: business owners that look to their business as their retirement fund.

Those businesses will have spent many years paying corporation tax on their profits, providing employment for millions of people and boosting the governments coffers with PAYE and NIC payments.

If changes are made then they will come into force via the October 2020 budget, and as is often the way, they will apply from midnight of the day of the budget.

I stress that there is no certainty that Entrepreneur’s Relief will be eliminated in full, but if it is then the cost to most business owners on exiting their business will be £100,000 of additional tax.

It is also worth remembering that the net of Entrepreneurs CGT rate has never been lower. If withdrawal of the relief was to be combined with an increase in the headline rate of CGT, the that could be devasting for the plans of business owners.

That risk is causing some to re-evaluate their plans for retirement plans and bring them forward. A sale process started in early August 2020 can reasonably be expected to complete before Budget Day, provided that the business is in good shape.

Despite Coronavirus, the market for acquisitions is buoyant; perhaps surprisingly so. Profit multiples are holding strong still helped (as has been the case for the last three years) by overseas acquirers taking advantage of UK companies being cheaper as a result of, to them, favourable exchange rates.

My view is that increasing the rate of CGT on business sales is damaging to entrepreneurship at the lower level of the market. I can accept the higher-level cut, although think £10m to £5m would have been more reasonable than to £1m.

I believe think that it punishes those that have been in business for many years. Perhaps a wiser course of action, if a change really must be made, would be to disapply the relief to any new companies incorporated after the date of the October budget.

However, I remain of the view that CGT on business sales is the ‘cream’, with business owners who have taken a risk and provided employment to many, having being milked already. To increase CGT is therefore unfair.

Directors need now to be thinking about what their business needs to do to come out of the Coronavirus recession safely. Many though will need to re-evaluate the sale of their company, and that is an untimely but necessary distraction.

Finally, I think the focus should be on growing the economy not taxing those who help to do so. Government debt is at historically low interest rates. The debt is at uncomfortably high levels. But a vibrant economy is likely to achieve than increasing CGT.

And one more thing…

Wealth tax: Politically I can see the logic for a wealth tax – those ‘with the broadest shoulders’…

But take out of their wealth, property which illiquid and can only provide tax revenue on sale, and deduct from their wealth debt, and the tax base that the wealthiest can provide falls to very low levels. More shoulders have to suffer.

Phillip Hammond is the latest to add his weight to the proposal this showing that it is a cross party concept.

However, the evidence shows that it is unlikely to have the required effect: France abolished its levy in 2017 as it was undermining enterprise. Switzerland still have theirs, but it is not for just the broadest shoulders – any shoulders with wealth of just €100,000 are taxed.