With CGT changes likely, let’s review the facts
Lord Leigh of Hurley, Deputy Chairman of finnCap Group & Senior Partner for Cavendish Corporate Finance LLP:
With the UK Government’s Office of Tax Simplification (OTS) review of Capital Gains Tax (CGT) underway, it is worth considering that – whilst the precise outcome is unknown – Ministers may well be likely to implement changes that will increase the current rate of CGT, given the strain on the public finances from coronavirus-related spending.
Whether or not the OTS recommends that the Government brings CGT rates into line with income tax, as has been rumoured, the fact is that a rise in the rate of CGT will impact business-owners. As a result, entrepreneurs should therefore consider and be prepared for what this eventuality would mean for them, particularly if they are intending to sell their business in the near future.
Looking at a hybrid model
It is not clear what shape any changes to CGT may take. At the moment, CGT is charged at 20% on the increase in value during ownership, with some relief for costs of sale, whereas income tax at the top rate is 45%. Personally, I think the Chancellor recognises that if he really wants the economy to grow he needs to persuade people to leave a low risk salaried job and start a new business employing people. After all some 85% of employment is in the SME space. To move from a low risk regular income to a high-risk possibility of zero income, indeed actually investing one’s own money, needs some inducement and recognition of the risk taken.
Therefore, I personally would be surprised if CGT and income tax rates are completely aligned. However, it might be that people in the Treasury are looking at a hybrid model. For example, where gains up to a figure of say £5m are taxed at the rate used elsewhere of 28 % and the surplus at 40%. The Chancellor has shown us in recent weeks that he is capable of creating and implementing new and novel ideas such as the eating out scheme and a fund providing private equity type investment.
Should you sell?
So, should business-owners simply look to sell-up now before CGT is increased? Unfortunately, whilst selling-up quickly may seem like the easy answer, it might not be quite so straight-forward a solution.
Due to the ongoing pandemic, it can be difficult to value a company accurately. This is clearly to the detriment of business-owners, as the extreme disruption of recent months has caused many businesses to be valued far below their normal market value. Conversely some in certain sectors, possibly such as life sciences, on-line retail, medical equipment, home office suppliers and others may actually be more valuable than before.
One outcome beyond the control of entrepreneurs which would adversely affect the return on their hard work would be if the UK fails to achieve a V-shaped recovery in the next twelve to eighteen months. Pairing this with an increase in CGT, business-owners would likely net significantly less from selling their businesses than in the current environment.
Reinforcing this, is the question of whether the Government will rescind Entrepreneurs’ Relief completely alongside increasing CGT. Prior to the lockdown, the UK Chancellor of the Exchequer, Rishi Sunak, announced a significant cut in the relief from £10m to £1m. But given the deteriorating public finances Mr Sunak might be tempted to remove it altogether. Personally I would regard this as a very retrograde step penalising millions of entrepreneurs who deserve praise and thanks for their determination to start their own company and invest their capital.
Overall, whilst the economic background is far from perfect, there are a number of factors critical to the future returns of entrepreneurs selling their companies which are out of their control. What is in their power, however, is to asses for themselves the current likely value of their business and decide whether it would be better to sell now or later.