What everyone should know about forecast changes to Capital Gains Tax
The events of 2020 have brought about unimaginable changes for businesses in the UK and across the world. Sadly, many have had to close their doors for good and all sectors have been affected in some way. Although some businesses, particularly those in technology and communications, have seen growth – in part due to the increase in remote working.
Since the start of the COVID-19 crisis, the government has been tasked with fortifying the NHS and propping up businesses that have been unable to trade, creating an estimated £394bn bill. Inevitably, these costs will be met through increased taxation, and one of the sources of this much-needed revenue is likely to be a change to Capital Gains Tax (CGT).
Anticipated changes to taxation have been postponed until March 2021, following the cancellation of the Autumn budget. This leaves little time for businesses to adjust before the new financial year but does leave a potential window of opportunity for those seeking to sell.
Why is the Chancellor seeking changes to Capital Gains Tax?
In July this year, the Chancellor wrote to the Office of Tax Simplification (OTS), an independent tax advisory service, calling for a review of CGT. Among the issues, he wanted to address was the disparity in rates between Capital Gains Tax and Income Tax.
Experts had predicted this tax was vulnerable to change and forecast the Spring 2021 budget as the most likely time. According to the OTS report, the move has the potential to bring in an extra £14bn by reducing exemptions and doubling rates. And, with just 276,000 people billed for CGT in 2018/19, this comes as close to a “popular” tax as the government can get.
Understanding Capital Gains Tax
CGT is paid by sole traders or business partnerships on profits gained from the sale of business assets. These may include land and buildings, fixtures and fittings, machinery, shares, registered trademarks, and the business’s reputation. Other organisations like limited companies pay Corporation Tax on profits from selling their assets.
There are exceptions – CGT is not paid on charitable donations or gifts to a spouse or partner, gilts and bonds, or ISAs. Individuals also have a tax-free allowance of £12,300, so CGT only applies above that threshold.
Business Tax Relief is still available
If you’re selling a business, there are extra reliefs currently available which might mean you pay less CGT. Business Asset Disposal Relief (BADR) – previously Entrepreneurs’ Relief - means you may pay a lower CGT rate, charged at 10% on the first £1m of gains.
The allowance applies at an individual level, so £1m is the maximum you can claim per person, rather than for each business you sell. Any gains above the £1m threshold are taxed at the full rate (20% or higher). However, it seems highly likely that these reliefs will be scrapped in the Spring 2021 Budget.
What will changes to CGT mean for your business?
The pandemic has shown us the importance of reliable technology and connectivity, so many companies in the tech and telecoms sector have had high rates of success. If you’ve had a particularly profitable year, your business will look highly attractive to prospective buyers - it might be the right time to consider selling. Similarly, this could be a positive move for business owners considering retirement. By pre-empting tax hikes, those in a position to sell may save a great deal of money. In fact, acting now could mean avoiding an increase of double what you’d currently pay.
In order to understand the value of your business and any assets you hold, it’s essential you speak to a financial advisor. It’s worth talking to one now to help you consider your options.
At Evolution Capital, we have the know-how and expertise to enhance the value of your company and have supported countless entrepreneurs, shareholders, and business owners to successfully navigate mergers and acquisitions.
Read more about our completed transactions here.