What next for Capital Gains Tax?
The revelation that Chris Rokos – the third highest taxpayer – is leaving the UK having paid £330m of tax last January will compound the headache that Chancellor, John Healey, has to grappled with ahead of his first Budget on 28th October.
From all sides the pressure is on and there has been a lot of discussion about wealth taxes in general, and Capital Gains Tax (“CGT”) in particular. Changes to these allow the Government to stick to the promise that they would not raise income tax, VAT or National Insurance (at least for the employee) in this Parliament.
But for the business owner considering a sale, the consequence of aligning CGT with income tax at 45% is a catastrophic erosion of wealth. Already the current Government, under Rachel Reeves financial stewardship has increased the main rate of CGT from 20% to 24%, but for smaller owners taking advantage of Business Asset Disposal Relief (BADR) selling eligible assets the increase was an inflation busing 80% as she increased the rate from 10% to 18%!
Putting a further increase into an extremely simple context, selling a business for £10m today should result in around a £2.4m tax bill. So you keep £7.6m. If the tax rate goes to 45% then that bill increased to £4.5m and you keep £5.5m.
Capital Gains Tax: What You’re Left With
Or to explain it differently, to end up with the same amount you would need to increase the value from £10m to £13.8m an increase of 38%, and buyers are not going to pay that without much improved performance. Afterall this is not their bill it is yours.
Historically, when Chancellors made their moves they did not sign post it by aligning changes with the change in Tax Year, rather it was announced a s fait accompli for transactions on or after Budget Day. However, Reeves did, in part at least, break with this tradition by announcing the reduction in the BADR would be over almost 18 month in April 2025 and April 2026. This may be exactly what Healey needs, to satisfy backbenchers, the City and economic pundits, while still accelerating sales and bringing in much-needed money now. The alternative, which is to announce any change as immediate may well do the opposite, at least for a while.
In recent weeks, we have seen an uptick in clients deciding to engage in a process so that whatever the outcome on 28th October they have a choice, and if he does signal a change, then they will be at the front of the queue when buyers are looking at who to acquire.
Michael Pay – EMC – Partner