Capital Gains Tax Update - Is it time to take Action?

21 August 2020

After much speculation about the abolition of Entrepreneurs’ Relief (ER) in the run up to the budget announcement in March this year, the UK Government decided to retain the relief in order to encourage genuine entrepreneurial risk-taking.

Entrepreneurs’ Relief (which had a name change in April 2020 to ‘Business Asset Disposal Relief’ (BADR)) is a relief from Capital Gains tax on qualifying disposals of business assets e.g. Shares and Trading Assets. Where BADR applies, the amount of Capital Gains Tax payable reduces from 20% to 10%.

However, benefiting from this relief has been significantly reduced, as the lifetime limit for qualifying gains has decreased from £10m to £1m.

The changes

From 11th March 2020, BADR claims are limited to the first £1m of lifetime gains – meaning any individual who’s already claimed Entrepreneurs’ Relief on gains of £1m or more will no longer qualify for the relief on any future disposals.

Provisions were also introduced which may apply the new £1m limit to arrangements/transactions entered into before 11th March 2020.

capital gains tax Review

On 14th July 2020, the Government advisory group – the Office of Tax Simplification (OTS), also began a review of Capital Gains Tax.

It’s generally seen as an easy target for revenue raising, so once again, there’s much speculation around the likely changes or cuts to Capital Gains Tax. There’s a consensus however that an increase in tax rates is highly likely.

There’s currently four different rates of CGT (10%, 20%, 18% and 28%), dependent on the level of your income for the tax year and the type of asset the gain’s arisen from. One option would be to align the Capital Gains Tax rates with Income Tax rates, which can be as high as 45%.

We highly recommend that clients with chargeable assets, and are considering a disposal in the near future, should revisit this strategy and seek advice. It would be advantageous to consider accelerating the disposal in order to secure what’s currently a certain BADR rate of 10%, where available, or CGT rates are no higher than 28%.

Other reliefs

Investors’ Relief, which means qualifying shareholders can benefit from a 10% rate of Capital Gains Tax on the first £10m of capital gains, remains unchanged. Investors’ Relief’s available to investors with qualifying shares of an unlisted trading company (or the holding company of a trading group) but, unlike BADR, it’s only available to investors who aren’t employees involved in the running of the business.

Shareholders may also want to consider whether they could introduce an ‘Employee Ownership Trust’ to their company. Where a shareholder sells a controlling interest in their company to such a trust, and various conditions are met, a 0% tax rate’s available on any gain that arises on the sale.

If you think your business might benefit from considering these options,

then please email me, or call the Tax team on 0113 537 3348, and we can explain further.