For business owners already considering selling-up then it would make sense to act fast before tax rates increase. It is widely anticipated that tax changes are afoot, and the future tax environment will be harsher on business owners whether these specific proposals go ahead or not.
The government has made unprecedented peacetime spending during 2020 to keep the economy afloat through the COVID-19 pandemic. However, it has yet to set out what action will be taken to address the cost, although measures will be necessary for both the long and short term.
Chancellor Rishi Sunak recently set out his spending review, and one noticeable omission was the proposed increase in Capital Gains Tax (CGT), which was making many company directors, investors and buy-to-let property owners anxious in anticipation, as it could have a significant impact on their finances.
A review of Capital Gains Tax, which was commissioned by chancellor Rishi Sunak, resulted in 11 wide-ranging recommendations from the Office of Tax Simplification (OTS) including raising CGT rates to similar levels as income tax rates and cutting the annual allowance from £12,300 to as little as £2,000.
What other tax benefits could change?
On top of potentially increasing CGT there are recommendations aimed at restricting the ability to claim Business Asset Disposal Relief (BADR), previously known as Entrepreneurs’ Relief.
Where applicable, this tax relief scheme reduces the rate of CGT to 10% to be paid on the sale or solvent liquidation of a limited company, however without this relief business owners face a 20% CGT liability on a business disposal if they are a higher rate taxpayer, but with the new recommendations this percentage could be even higher.
Added to the fact in March of this year the lifetime allowance for BADR had been reduced from £10 million to £1 million, so its benefits for many business owners are quickly diminishing.
For solvent businesses considering closing down through a Members Voluntary Liquidation (MVL), the Business Asset Disposal Relief is one of the main benefits for this process.
What do these changes mean?
Currently, in an MVL situation the BADR is calculated using the date of distribution of funds by the Insolvency Practitioner. This tends to be in two stages; an initial payment, followed by a final payment, once all debts have been paid and repayments received.
Claiming BADR must be done through HMRC as business owners will need a receipt of a VAT repayment and Clearance from HMRC. The Clearance is essentially confirmation from HMRC that they consider the company to have no outstanding debts due to them.
The process usually takes six months, however due to coronavirus, HMRC is seeing staff shortages meaning the process can take significantly longer in the current environment.
If you are a business owner considering selling your business and using this route, it will be necessary to allow adequate time for completion of the MVL process before any potential changes come into play. Insolvency practitioners we’re working with have seen an increase in MVL work this year due to the concern about tax rises, and savvy business owners are already preparing themselves. The apparent inevitability of these tax changes is prompting more business owners to consider taking action sooner rather than later.
Act fast or risk bigger tax bills
At the moment, this is simply policy speculation, and we don’t know whether these changes will come to fruition, but given the fact that the government commissioned the OTS to produce the report, it should be taken seriously.
For business owners already considering selling-up then it would make sense to act fast before tax rates increase. It is widely anticipated that tax changes are afoot, and the future tax environment will be harsher on business owners whether these specific proposals go ahead or not. Therefore, it would be prudent to review your assets nonetheless and always seek professional advice before making a big financial or business decision.
If you’re looking for any legal advice on the back of these changes, please contact me directly on firstname.lastname@example.org.