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.
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.
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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.
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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.
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