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Spotlight On: Capital Gains Tax simplifications recommended by OTS in new report

Last week, the Office of Tax Simplification (OTS) published its report on simplifying the CGT regime. Corporate Tax partner, James Pilbeam, looks at the proposals and the potential impact for entrepreneurs and business owners.

CGT rates have been under the Government’s spotlight for some time and there has been continuous speculation (even prior to the Coronavirus pandemic) that rates will increase. In the March 2020 Budget, the Entrepreneurs’ Relief lifetime limit was slashed from £10m to £1m and became known as Business Asset Disposal Relief. Despite this change some quarters of Treasury and Government insist that the 20% CGT rate is too low when compared to Income Tax rates and needs to be addressed.

Entrepreneurs and business owners who are considering a sale of their company would be impacted through a CGT rate increase. Nine months ago, someone selling their business for a profit of £10m would pay £1m in CGT (where Entrepreneurs’ Relief applied); the same disposal today would attract a tax bill of £1.9m where Business Asset Disposal Relief applies. If CGT rates are aligned with Income Tax rates, that tax bill in the future could be £4.5m.

The proposals from the OTS are merely recommendations and it doesn’t mean that they will all be necessarily taken forward. However, it seems increasingly likely that CGT rates will rise in the near future. We do not know when any change will take effect from, but the earliest point is expected to be from 6 April 2021 (although we do not have a confirmed date for the next Budget). You can read our latest blog for further details and our expert comment on the OTS’ proposals.

What should you do next?

If you are considering a sale of your business or company shareholding, you may want to consider planning to ‘lock in’ the current CGT rate. There are several ways to achieve this, such as a transfer to a trust or company, but any planning needs to be carefully managed alongside the personal and commercial considerations.

If you are already in a sale process, or anticipate one in the coming weeks or months, and part of your consideration includes a ‘rollover’ or reinvestment, you should consider whether the transaction can be structured in a manner that triggers tax on more value upfront, rather than the tax being deferred.

Some entrepreneurs and business owners are also starting to consider leaving the UK to become non-UK resident in anticipation of a future sale of their business. As always, careful planning is required, and it is important to note that someone would need to remain non-UK resident for more than five tax years for such a strategy to be effective.

Would you like to know more?

If you would like to discuss any of the above guidance, please get in touch with your usual Blick Rothenberg contact or with James using the contact details on this page.