How will changes to Capital Gains Tax affect Business Asset Disposal Relief?
As well as having to design and refine the various Covid-19 support packages deployed this year, he also has to look ahead at the likely support requirements for early 2021 and beyond.
If this wasn’t enough to content with, he’s also looking around for ways to help pay for it and a new report published this week by the Office of Tax Simplification (OTS) has given him some serious food for thought.
He asked them in July to come up with some idea on how Capital Gains Tax (CGT) could be brought more into line with other forms of taxation.
Currently there are four different rates of CGT. For basic rate income tax payers, the CGT is 18% on second homes and buy to lets and 10% on other assets. For higher rate taxpayers the rates are 28% and 20% respectively.
Bill Dodwell, tax director of the OTS said: “If the government considers the simplification priority is to reduce distortions to behaviour, it should consider either more closely aligning capital gains tax rates with income tax rates, or addressing boundary issues as between capital gains tax and income tax.
“A rough static costing suggests that alignment of CGT rates with income tax rates could theoretically raise an additional £14 billion a year for the exchequer.”
The changes will also directly impact Business Asset Disposal Relief, previously known as Entrepreneurs’ Relief until April 2020.
Chris Horner, Insolvency Director with Business Rescue Expert said: “The OTS report has given the Chancellor 14 billion reasons to implement changes to CGT and in normal economic circumstances, this would be enough to take a closer look.
“In the reality of 2020, it’s an imperative.
“As well as increasing CGT significantly and doubling the current rates, there are recommendations aimed at restricting the ability to claim Business Asset Disposal Relief, previously known as Entrepreneurs Relief, which is one of the main benefits of pursuing a Members Voluntary Liquidation (MVL).
“These include requiring a minimum 25% shareholding to qualify; initiating a ten-year holding period before relief can be claimed and a possible requirement that beneficiaries be close to retirement age before they can claim.
“If any or all of these are implemented then they’d have a significant effect on the ability of directors and owners to benefit from MVLs in the same way.
“Realistically, the earliest these changes could come in would be April 2021 which means anybody considering entering an MVL to take advantage of business asset disposal relief shouldn’t wait any longer.
“These are the clearest signals that change is coming and the best way to avoid any negative consequences of this is to start the process sooner rather than later.”
Governments are used to considering the effects of new laws they propose but one thing they can’t always accurately predict is the law of unintended consequences.
Changes to Capital Gains Taxes won’t just impact on owners and directors looking to efficiently liquidate their businesses. Landlords and shareholders will also have to consider their positions if the prospect of paying double suddenly appears.
It’s part of our job to let our clients and friends know about legal and technical changes that will affect them and while this report just contains recommendations at the moment, there is every indication that the Chancellor is seriously considering them or similar solutions.
The only way to make sure that you won’t be caught up in any turbulence is to act now while the current system still applies.
We can begin to work through your ideas and plans with you, let you know exactly what the current state-of-play is and what you can expect from any procedure you embark on.