Now that we have a new coalition government, many people’s attention will be keenly focused on the Budget on 22 June, in which we will get our first real taste of the coalition’s taxation policy. A rise in capital gains tax (CGT) seems to be on the cards, despite a reported rebellion against this by some Tory backbenchers.
What’s the problem?
Although personal Income Tax rates range up to 50%, the rate of personal CGT is at present a maximum of 18% (with a rate of 10% potentially applying to gains of up £2m on qualifying assets). The comparatively low rates of CGT have been attacked by some well-publicised press stories of hedge fund managers being able to convert all their income into capital and paying less tax than their cleaners. In addition, as the government seeks to reduce the budget deficit, CGT rates are bound to come under attack.
On the other hand, the historically low rates of CGT are said to encourage entrepreneurship – certainly, high rates of CGT provide less incentive for entrepreneurs to set up new businesses, which provide new jobs and may also provide technological or environmental advances. This has partially been recognised by the government which issued a statement after announcing the budget date confirming that the coalition agrees “to seek a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities”.
What’s going to happen?
Gazing into a crystal ball is beyond the remit of this article. It seems likely that CGT rates will increase, perhaps to the same rates as income tax. Given the above announcement regarding exemptions for entrepreneurship it seems likely that some relief for entrepreneurs will remain, though we do not know if it will mirror the current Entrepreneurs’ Relief. Even if it does, the question remains whether the relief will continue to relieve the taxpayer of 4/9ths of their liability (currently reducing a rate of 18% to an effective rate of 10%, but only reducing a rate of 40% to an effective rate of over 22%) or whether the relief will be fixed at 10%.
Finally, although the budget is set for 22 June, any changes could be brought into effect immediately, on 6 April 2011, or even backdated to 6 April 2010.
What can I do?
If you are contemplating the possibility of making a disposal in the medium term which would give rise to a substantial gain you may wish to consider the possibility of accelerating the disposal so that if falls into a period of comparatively low tax rates. We can advise on appropriate tax planning to shelter any future gain from higher CGT rates.
Strangely, although the potential rise in CGT has been well documented, there does not seem to be any sudden rush in the transaction marketplace to complete disposals prior to 22 June. This contrasts with two years ago when, after the budget, there was a rush to complete transactions by 5 April 2008 before taper relief on capital gains was abolished. This could be down to the current economic climate – people thinking selling at a lower price to reduce tax will not realise as much as selling at a potentially higher price, even with more tax to pay in the future. Alternatively it could be that people do not believe they will be adversely affected by any new CGT regime. Either way, the next three weeks set out to be an interesting period in the Merger & Acquisition landscape.