Fears are growing that business owners could find themselves on the wrong end of capital gains tax (CGT) rises in next month’s Budget. The gap between income tax and CGT rates is an obvious target for Rachel Reeves, the chancellor, as she looks to raise more money for the Treasury. The tax bill on sales of businesses may therefore be set to rise.
There are several possibilities for reform. The simplest measure would simply be to raise CGT rates. Currently, if you sell your business, you pay a higher rate of CGT of 20%; that compares with the higher and additional rates of income tax of 40% and 45% respectively. One option for the chancellor would thus be to raise CGT rates, though equalising them with income tax would leave the UK with one of the costliest CGT regimes of all advanced economies worldwide.
Are capital gains tax reforms on the way?
Another possibility for the government is to target the tax reliefs that most company owners currently qualify for when selling the enterprises they have built. In particular, business-asset disposal relief – previously known as Entrepreneurs’ Relief – means business owners only pay CGT at a rate of 10% on their first £1 million of profits.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
This makes quite a difference. Sell a business at a £3 million profit and, at the current rate of CGT, you would pay £500,000 of tax under today’s rules; without business asset disposal relief, that bill would increase to £600,000.
Holdover relief could also be a target for Reeves. This is a tax break designed to help people pass businesses on to family members. It enables you to sell the business to a child, say, for less than the market value of the company – or even to pass it on for free – without having to pay CGT at a level calculated as if the deal had been done at market prices. Holdover relief moves the liability for the full amount of CGT on to the family member, but they don’t have to pay until they sell the firm, which could be years into the future.
Bear in mind that none of these reforms are mutually exclusive. The chancellor could decide to both abolish CGT reliefs for business owners and raise CGT rates. If so, some business owners will face tax bills that are far higher than they would have been under today’s regime.
That possibility is prompting warnings from groups such as the Institute of Directors that changes to CGT could deter the next generation of entrepreneurs and put people off investing in new business start-ups. Maybe so, but Reeves will point out that the UK’s CGT regime is currently generous by most international comparisons – and that the number of people starting businesses in the UK has hit record highs in recent times.
As for existing business owners, the reality is that it is going to be difficult to do much to get ahead of the changes. It takes time to sell a business, and rushing a sale through to beat a tax reform that might not happen could be very costly. Accountants and corporate finance advisers do report increases in inquiries from business owners concerned about the Budget, but most are counselling caution.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
-
Number of ISA millionaires triples in three yearsThe number of people with £1 million in their ISAs has tripled in three years to reach 3,180. But could next week’s Budget put an end to future ISA millionaires?
-
IMF upgrades UK growth forecasts ahead of Budget - here is what it meansThe upgrade comes ahead of chancellor Rachel Reeves's first Budget on 30 October, where she intends to explain how she will further boost UK economic growth
-
Will the R&D tax credit change in the Autumn Budget?Will Labour revise state help designed to foster R&D in the upcoming Autumn Budget?
-
What can small businesses expect from Labour's employment law reforms?Small businesses could be impacted by Labour’s reforms to employment law which will be unveiled next month – here's how to prepare.
-
How SMEs can secure public sector workWhen it comes to bidding for public sector work, there are a few things SMEs can get a grip on
-
How to choose a web hostWith a web host, your company will have an internet presence
-
Could the new Growth Guarantee Scheme help boost your business?The new government-backed Growth Guarantee Scheme is aimed at helping businesses recover from the pandemic. Is it worth considering and are you eligible?
-
Is it time for a global wealth tax?Labour is planning to implement wealth taxes if it wins the election. Will it pave the way for a global crackdown on the rich?
-
How businesses can cut energy costs and boost efficiencyHere's how small businesses can monitor energy costs even though they don't benefit from the Ofgem energy price cap.
-
What could a general election mean for apprenticeships?Labour and the Conservatives have competing approaches when it comes to apprenticeships and funding young workers. But how are they supporting small businesses?
