Many more people may have to pay Capital Gains Tax (CGT) if the recommendations of a government-ordered report are adopted.
A report by Office of Tax Simplification (OTS) commissioned by the Chancellor Rishi Sunak has proposed bringing the rate at which CGT is paid into line with income tax, reducing the annual allowance, restricting the reach of Business Asset Disposal Relief (the successor to Entrepreneurs’ Relief) and abolishing Investors’ Relief altogether.
CGT and the Current Reliefs Available
Capital Gains Tax is broadly a tax on the gain realised on the difference between the purchase price of an asset and its value on sale, minus any allowable expenses and losses.
Higher rate taxpayers pay any CGT entirely at the higher CGT rates: 28% for gains on residential property disposals and 20% for gains on other assets. Every individual is entitled to an annual exemption to set against all gains made in a tax year, the annual exempt amount is £12,300 for the 2020/21 Tax Year.
Since its introduction, CGT has always given specific relief for the disposal of certain business assets. Currently, where there is a disposal of business assets, eg: shares owned by an individual for more than 2 years in a trading company of which the individual owns more than 5% of the ordinary share capital of the company, will qualify for Business Asset Disposal Relief, reducing the rate of CGT payable to just 10% subject to a lifetime limit of £1million of gains.
Investors’ Relief was announced in the 2016 Budget as being an “extension of Entrepreneurs’ Relief” for external investors in unlisted trading companies that also operates by applying a 10% CGT rate on the disposal of qualifying shares after a minimum holding period of 3 years subject to a lifetime cap of £10 million.
For companies offering shares or options to their employees as incentives, the arrangements can generally be structured so that no income tax is payable on the grant of the incentive with the uplift in value subject to CGT on a future disposal.
If held for the qualifying 2 year period, most share incentives will qualify for Business Asset Disposal Relief, meaning that an employer effectively gives value to an employee with a 10% tax rate rather than up to 45% paid on employment income.
What are the proposed changes and how will they affect Tech sector businesses?
The proposals include:
- Raising rates – to align CGT rates with income tax rates so as to dis-incentivise business owners from arranging their affairs so that income is effectively re-characterised as capital gains, for example by holding cash within a business, rather than paying it out.
- Reducing the annual exemption – the OTS report sets out that assuming taxpayer behaviour remained the same, the number of taxpayers paying CGT in 2021/22 would double if the exemption were reduced to £5,000, and would nearly triple if reduced to £1,000.
- Business Asset Disposal Relief – targeting this relief to an older demographic by reintroducing a minimum age, ie to encourage the relief to be used by those who have built up their businesses over time having held their shares for at least 10 years; and increasing the minimum shareholding to 25%.
- Investors’ Relief – to abolish this entirely due to lack of use since its introduction in 2016.
What you can do?
Those looking to benefit from existing reliefs may, where appropriate, seek to bring forward a disposal so that this is made before the next Budget due to take place on 3 March 2021.
Although there is no suggestion that such wide-reaching changes will be rushed through before next year’s Budget, it is possible that there will be a withdrawal of Business Asset Disposal Relief and Investor’s Relief.
For those with entitlements to shares through existing share schemes, it is hoped that changes would allow for a transitional period so that those with existing awards would be taxed as originally anticipated. Until such time as there is more detailed consultation, employers seeking to incentivise employees should still consider share schemes as a viable option.
Emma Bradley is a partner in the Tech team at national law firm VWV. Emma can be contacted on 07747 462 131 or at email@example.com