Budget 2021- no change to CGT (for now), but still plenty going on
There was much speculation about changes to capital gains tax (CGT) in the run up to the 2021 Budget. LinkedIn is rife with corporate deals in various scenarios (MBOs, trade sale and private equity) being completed shortly before the Budget. It is pleasing to see so many regional advisers prominent in those deals.
It turned out there was no change to the CGT rates. The rates remain at 10% for basic rate taxpayers and 20% for higher rate taxpayers for share and business sales. Those selling residential property continue for now to pay CGT at the rates of 18% and 28%.
The rules for business asset disposal relief (aka entrepreneurs’ relief or ER) also remain unchanged. ER applies a generous 10% CGT rate for owners of “ordinary shares” in trading companies or groups in which they work or are directors. ER was decimated (literally- it was cut by a tenth!) in the 2020 Budget when the lifetime allowance was cut to £1m from £10m. ER was reduced from a maximum value of £1m per taxpayer to £100k.
The Courts continue to grapple with the finer details of ER. The Upper Tribunal in the case of Warshaw (December 2020) clarified what is meant by “ordinary shares” (a deceptively complicated concept, especially where there are preference shares in place) with HMRC losing again. HMRC had better luck in The Quentin Skinner 2005 Settlements (February 2021) when the Upper Tribunal agreed with HMRC that qualifying beneficiaries of a trust must hold the shares for the qualifying period of two years (one year in the past).
The role of elections to crystallise gains and claim ER (where otherwise there would be no disposal for CGT due to the reorganisation rules) has featured strongly in recent deals. Whilst speculation remains over increased CGT rates it could be a good strategy to make the election, suffer the dry tax charge and pay at the lower rate. Uncertainty over the wording of the relevant legislation has led to a cash money-go-round on some deals, rather than risk relying on the election.
It remains the case that owners of family businesses who plan their exits well in advance achieve better outcomes commercially and for family harmony, as well as for tax. The qualifying period for ER is two years. Too often opportunities are missed as shareholdings and structures are not considered early enough.
Anxiety will continue around CGT. The Office of Tax Simplification published its report Capital Gains Tax: Simplifying by Design in November 2020. One key recommendation is to more closely align CGT rates with income tax rates. Another is to replace ER with a relief more focused on retirement. Plus ça change!