Chancellor Rachel Reeves has CGT in her sights – we explain why

Welcome to the latest in our continuing series on Capital Gains Tax (CGT) and Business Asset Disposal Relief (BADR).

Last time we looked in more detail at the history of CGT to see how and why it has developed the way it has.

Now we look in more detail about what its immediate future could be as new Chancellor Rachel Reeves considered her fund raising options before the new government’s first budget in September or October. 

The signposts are there

In November 2020, the Office of Tax Simplification (OTS) produced the first of two government commissioned reports into the future of Business Asset Disposal Relief (BADR). 

The main recommendations were to:-

  • Consider more closely aligning income tax and CGT rates (being mindful that this would then require a new relief for inflation and/or a rebasing exercise). 
  • Consider reducing the number of available CGT rates and making them not dependent on income
  • Reduce the annual exempt amount
  • Scrap BADR altogether and replace it with a relief focused on retirement

SInce then the previous government made some changes to achieve some of these aims including the CGT annual exemption. 

From April 6th 2023, it was reduced from £12,300 to £6,000 for the 2023/24 tax year and from April 6th 2024, was reduced to £3,000 for 2024/25 and subsequent tax years. 

Regarding BADR, this relief was used to apply the first £10 million of lifetime gains but was reduced to £1 million in the March 2020 Budget.

Before the election, HMRC released data that showed the 9,000 people paid £5.1 billion in tax on £33.7 billion of capital gains income in the latest financial year available. 

This equates to an average tax rate of 14.8%, which is lower than the basic rate of income tax of 20% that people on salaries between £12,501 to £50,000.

This will not have escaped the notice of the new Chancellor and her team. Especially with a manifesto commitment not to increase taxation rates on income tax, national insurance or VAT.

The OTS review was rightly or wrongly sidelined by then Chancellor Rishi Sunak because the Covid-19 response took priority but it could be seen as a clear warning shot and potential future direction of travel for any government.

Business owners able to access the benefits of BADR enjoy a generous relief that standard PAYE payers don’t enjoy. 

Anybody selling an asset would pay the standard 20% CGT rate payable on any profit made over and above the current £3,000 CGT limit. By contrast most sellers of privately owned businesses qualify for BADR (as entrepreneurs’ relief was renamed). 

This reduces CGT to 10% on the first £1 million of profits and if the business delivers a return of more than £1 million; BADR would provide them with a benefit worth the best part of £100,000. 

It wouldn’t be cost free to scrap BADR however and if combined with an increase in CGT then it would be even more expensive. 

The 20% CGT rate on gains from asset sales is modest compared to the higher and additional rates of income tax (40% and 45% respectively). Assuming CGT rates were brought into line with income tax rates then selling a business at a profit of more than £1 million would see a £350,000 increase. 

Disposals to family members could also be under the microscope. If a business is given away or sold under market value then the CGT calculation would be made as if full value had been received for the asset. 

The only way to avoid a large bill would be to apply for holdover relief which eventually passes the CGT liability onto the buyer of the business who must pay any extra tax when they dispose of it. 

These arrangements are most commonly seen when business owners pass the company onto their children or other relatives. Holdover relief isn’t set in stone so could be restructured to be less generous or even abolished altogether which would impact family run businesses.

The King’s Speech contained several measures that will affect business owners and directors but the more significant legislation and announcements will be carried in Labour’s first budget in September or October. 

The future of CGT and BADR are definitely on the line meaning that directors only have weeks to take advantage of the financial benefits available to them by closing their solvent companies sooner rather than later. 

Get in touch with us today to discuss how you can take advantage of a Members Voluntary Liquidation (MVL) which is the most effective way to close a profitable business and enjoy the benefits – while they are still available.