What are the potential changes going to into 2021?
Most of us believe that 2021 has got to be better than 2020 (although we think we probably said the same thing this time last year!). We can all, however, agree that 2020 has been tough and the pandemic has brought a hard financial toll on the UK economy (how harsh is yet to be found out) and it is highly likely that there will be changes to the UK tax regime to replenish the government’s hard spent coffers.
The Office of Tax Simplification (OTS) announced a few weeks ago a review into capital gains tax (CGT) and that it would be reporting back to the government on a number of suggestions as to how to restructure the current CGT regime. At present CGT stands at 20% (28% if you are selling taxable residential property), but further reliefs have been available to knock this down to 10% (18% if residential property). However, CGT relief has been attacked by the government over recent years with Entrepreneur’s Relief being eroded from a £10m lifetime allowance to a mere £1m allowance under the new Business Asset Disposal Relief (they even called it BAD!).
The OTS has made the following recommendations:
- Alignment of CGT with income tax. This could lead to CGT rates of up to 45% under the current income tax rates;
- Reduction to the CGT annual exemption. It has been suggested to reduce the current allowance of £12,300 per individual per annum to potentially a meagre £3,000;
- Employee Options. Currently, employees can acquire and dispose of shares in their employer’s company which are exempt from CGT under certain tax approved schemes (such as Enterprise Management Incentives or EMI). Changes to such rules may be considered;
- Abolition of Investor’s Relief. This is a similar relief to what was Entrepreneur’s Relief and reduced CGT to 10% on the sale of shares by investors who are not directly involved in the operation of the target company; and
- Changing the BAD thresholds. Currently, to qualify for BAD, you must have a shareholding of 5%, but it is being considered to increase this to 25% to make it available to fewer people.
Is it all bad news?
In short, no, as the above are only recommendations and none are not currently set in stone, but business owners, shareholders and entrepreneurs need to be mindful of the potential implications, should any of these proposals come into play soon. This means that shareholders should start to consider their plans and the alternatives available to them should they be looking to sell their shares in the near future, for example:
- If you are considering selling in the next 12 months, it is worth considering bringing forward your timetable to ensure that when you sell, you sell under the current known CGT regime;
- If a sale is being considered but it is not possible to accelerate it, there may be options to restructure the company now to trigger any existing CGT liabilities under the current rules;
- Share Options – as mentioned above certain share option schemes are exempt from CGT, so it may be worth putting these in place now to obtain the benefit of such tax reliefs for the future;
- Employee Ownership Trusts (EOT)– If you sell your shares to an EOT and satisfy all the relevant conditions, such transaction would be 100% exempt from CGT. You can see more information about how we can help you with EOTs here.
- Family Investment Companies (FICs). As companies pay corporate tax as opposed to CGT and the current rate of corporate tax is 19%, it may be worth transferring any shares or other assets into an FIC. This would crystallise any existing CGT liability as well as provide other tax benefits, including in relation to income tax and inheritance tax. You can find out more about FICs on our website here
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If you would like to discuss any of the options above or just want to speak to one of our corporate lawyers, then please contact us on 0161 941 4000 or via email at firstname.lastname@example.org.