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With a budget deficit to reduce, the UK Government may well look to Capital Gains Tax to fill part of that hole. There are two changes proposed by the Office of Tax Simplification which have caused much debate: the reduction of the personal allowance and the increase in the rates at which tax on chargeable gains is charged. What should taxpayer be thinking about now if they are planning to make a large disposal and what planning opportunities are available.
The only thing that is certain is that uncertainty is a constant. This state of play has become the norm for businesses over the last few years and therefore the recent debate about capital gains tax (CGT) and whether or not the rates will rise is just another uncertainty business owners must factor into their forward planning.
The debate has its genesis in a review of capital gains taxes carried out by the Office of Tax Simplification (OTS) at the behest of Rishi Sunak in his capacity as Chancellor. Following the outcome of that review, two particular recommendations have attracted a lot of attention: the proposal to increase CGT rates to align with income tax rates and the reduction of the annual CGT allowance. Since these proposals were made in 2020, there has been much speculation as each Budget event approaches.
In November 2022, the Chancellor announced that the annual CGT allowance would be reduced from £12,300 to £6,000 from April 2023 and then to £3,000 from April 2024. This change limits the ability to shelter capital gains arising on the sale of assets. However, if you are planning ahead regarding the sale of your business, you may still be able to benefit from the allowance. See below for more on this.
So far, the government has shown no inclination to increase CGT rates and, Rachel Reeves, the Shadow Chancellor for Labour, has confirmed recently that Labour has no intention to increase CGT rates either. However, since the deficit in government funding, started by the pandemic and added to by the cost of living crisis, has not gone away, any government is going to be faced with having to find the extra funds to pay for new (and old) spending. Are there any measures you should be considering, as part of proper tax planning, that could protect you against a CGT rate rise?
- Are you considering selling your business? If so, consider whether or not you can bring this event forward into this tax year. Currently, CGT rates are significantly lower than income tax rates, with higher and additional rate taxpayers paying 20% (assets) and 28% (residential property). The equivalent income tax rates are 40% for higher rate taxpayers and 45% for additional rate taxpayers. Moreover, and also for the time being, the Business Asset Disposal Relief has not been amended in any way which means that a qualifying disposal could result in the CGT rate being only 10% on the first £1m of proceeds (provided none of that limit has been previously used)
- If a full sale is not appropriate at this time, could a partial sale of shares be a consideration so that you realise a gain on a portion of your shareholding and crystallise the tax charge now?
- If you are holding any carried forward capital losses now may be a good time to consider using these by crystallising the capital tax charge and sheltering some of the gain
- If you are not considering a sale right now, consider some tax planning strategies. For example, it may be appropriate to transfer some shares to your spouse or civil partner. Such a transfer can take place free of any tax and if your partner pays tax at a lower rate this may be a useful tool in reducing the overall tax burden when it comes to selling the shares. In the current tax year, the CGT allowance can also be used here to shelter £6,000 of tax for each shareholder.
As always, we recommend that you take some professional advice when considering your options and the tax team at Michelmores stand ready to support you in making these decisions. If you require any further information, please contact Cathy Bryant or Anthony Reeves.
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