Specialist Tax Adviser Adam Rollason provides insight on the planning opportunities for company shareholders ahead of 2021 Spring Budget.

“With the effects of Covid-19 pushing UK national debt to a record high, I think we can all agree that Chancellor Rishi Sunak will be under intense pressure to increase the tax revenues in 2021 and beyond. Speculation continues to mount as to how this will be achieved, a strategy for which is expected to  be announced in the forthcoming  Spring Budget (pencilled in for March 2021), which will undoubtedly form part of the Government’s wider plan  to recoup some of the money spent supporting the country through the pandemic.

As already widely predicted, Capital Gains Tax (CGT) would be an obvious target, with the main rate applying to gains arising on the disposal of most assets currently capped at 20%. A view shared by many is that CGT provides the wealthy with an unfair tax advantage, especially when compared to payroll taxes levied on earnings which can be as much as 47%. Coupled with the Chancellor’s recent decision to instruct the Office of Tax Simplification (OTS) to carry out a review of CGT, it would seem inevitable that changes are on the cards, the question is simply what form will these take and how soon will they be introduced?

Is the Chancellor likely to go as far as aligning Income Tax and CGT? Personally, I am not so sure we shall see such a significant hike, certainly not in the current climate. I suspect a blanket increase in the main rate of CGT from 20% up to say, 25% or even 28% is far more likely in 2021, with any drastic changes postponed until after the pandemic.

“Scrapping the Autumn Statement has extended the window of opportunity and provided some much-needed breathing space, but now is the time to act”

At present, UK business owners and entrepreneurs continue to have access to historically low rates of CGT, but it is highly unlikely that these rates will be around for much longer. Scrapping the Autumn Statement has extended the window of opportunity and provided some much-needed breathing space, but now is the time to act, particularly for those who have been  considering selling their business or have previously began a sales process and  their transaction has ‘cooled down’  whilst the market recovers post lock down.

“A window of opportunity for business owners to recommence sale proceedings – but time is undoubtedly of the essence”

With this in mind, I would advise business owners to carefully consider whether the time is right to recommence sale proceedings, as for CGT purposes at least, time is undoubtedly of the essence. Where a deal is on the table, business owners should be seeking to accelerate the sales process where possible, as completing before the Budget is undoubtedly the best way to protect themselves from the likely tax hikes that lie ahead.

Understandably, however, not all businesses will be in the same position, with many presenting a far weaker looking Balance Sheet than the one that existed pre-lockdown. As a result, a sale before the budget may not be a viable option and it is our role as trusted advisers to ensure that clients are not pressured into making the wrong decision.

It is however worth highlighting that, even where a sale of the business is unlikely to happen pre-Budget, tax planning should be considered as an alternative to ‘lock in’ the benefit of the existing CGT rates. Broadly speaking, there are a number of options available to the shareholders, which in theory should achieve this, or depending on their long-term objectives, may even provide a better result. However, the pro’s and con’s associated with each alternative option will need to be considered carefully. I have set out a brief summary of two potential options below:

  1. For business owners that are unlikely to need the cash proceeds generated from a sale personally, a sale at holding company level should be considered. Any gains generated from the transaction would be subject to Corporation Tax rather than CGT, which at present is set at an even lower rate of 19%. Furthermore, it may be the case that any gains arising are exempt from Corporation Tax altogether, although this would be subject to certain qualifying conditions. This idea may work well for entrepreneurial business owners that would likely be looking to invest the majority of their net proceeds into the next business venture.
  2. Alternatively, there are also several other ways to accelerate a disposal and, in turn, lock in the benefit of the current rates of CGT. One example of this would be a simple share for share exchange undertaken to insert a new holding company on top of the existing structure. In normal circumstances, we would apply for tax clearance on such a transaction to obtain confirmation from HMRC that they agree that the transaction is being undertaken for a commercial purpose and not for the avoidance of tax and therefore the tax rollover treatment would apply. However, it is possible in certain circumstances to make an election to disapply this treatment and crystallise a capital gain at the date of the exchange. Of course, this does provide the shareholders with an unfunded tax liability, however, payment of this liability will not be due until January 2022 and therefore, as long as the company has been sold by that point and the cash consideration received, this shouldn’t cause the selling shareholders any issues.

I should, of course, point out that caution will need to be exercised when considering any of the above options. Every business owner’s particular situation will differ, and, as a result, these options will not always be suitable in every scenario. It is absolutely crucial that when  considering a sale or restructure in any capacity, professional advice is sought as a matter of urgency from specialist advisors that are well versed in the selling of businesses and the associated tax implications arising from such transactions.

“I would urge business owners and entrepreneurs to engage their professional advisers without further delay”

Finally, as they consider the options available to them, whether they are looking to  sell or to restructure, I would urge business owners and entrepreneurs to engage their professional advisers without further delay in order to ensure that there is adequate time between now and the budget to implement their chosen transaction in a timely manner. ”

Here at Smith Cooper, we understand that protecting your wealth is a priority, which is why our team of dedicated advisers work with you to create effective personal  and corporate tax-planning strategies. We advise on every aspect of your tax position, and can provide one-off specialist advice or ongoing services, depending on your specific needs. If you would like more advice regarding CGT, please get in touch with one of our dedicated tax experts today.