What will happen to CGT?
What will the Chancellor will announce at the next Budget on 3 March 2021 is anyone’s guessing game. However, it is quite likely the rate of what companies pay on gains, called chargeable gains and individuals pay, called Capital Gains Tax (CGT) is sure to rise from the low rate rates that people will otherwise pay on the next tax year. So from 1 April for companies or 6 April 2021 for individuals, the amount you pay will sure to rise.. Many are expecting that Corporation tax and capital gains tax rises will be expected as a result of the COVID-19 can pandemic which is affected all known economies and in particular the UK with the highest death toll in Europe.
If this proposed Capital Gains Tax just get reformed it would mean a dramatic change in how businesses and property investors were to view their investments potentially changing the effect of how they draw out their money and their expectations for retaining the business for a long period of time to make a lower game. What may happen is property and businesses are disposed of more frequently because the long-term benefits of a capital gain is not there anymore. this will also affect partnerships and soul traders as they also retain a business value in the holding the may retain.
Will the capital gains tax rates increase in 2021?
It’s a bit of a leading question because we have a situation which we’ve never seen before. The economy for the last year contracted by 9.9%meaning that normal forms of income tax and Corporation tax on companies’ profits would have not come in at the same time as all the various government grants and schemes have meant a record pay out for supporting the economy, your home income, businesses to survive and of course the related expenditure related to the NHS and to combat against COVID-19 in addition to the unprecedented efforts in administering the vaccine. The situation is therefore incredibly likely that the rate of capital gains tax will need to rise to support paying for this. For months now there has been speculation that capital gains tax rates will go up in the forthcoming Budget. The British economy, which suffered under the COVID-19 pandemic, has been propped up by the furlough scheme and a number of other schemes.
How much will the capital gains tax rate go up by?
If the Chancellor made the CGT in line with the rates of income tax, this would make the top rate of capital gains tax to 45%, a rise of 25% for a higher and additional rate taxpayers. Basic rate taxpayers, would face an increase of 10%(or 18% for residential property) to 20% capital gains tax) – or higher rates on large gains treated as the top slice of income. This would bring the capital gains tax rates to the levels to what we saw 21 years ago, when it was last equalised with income tax.
While equalising rates is a possibility, another, perhaps stronger possibility, is that the capital gains tax rates go up, but by a smaller amount. This could mean a new capital gains tax rate of 25% to 30% for higher and additional rate taxpayers. This would partially satisfy the Exchequer’s need for increased cash collection whilst mitigating against the dis-incentivising effect that equalising the capital gains tax with income tax would have on investment and entrepreneurship – an important consideration if the Chancellor wants to attract new business into the country after Brexit.
Will it make a difference to the shareholders if they accelerate their share disposals before the Budget date?
Many business owners who are already in the process of selling their business have decided to complete their disposals before 3 March 2021 to mitigate against the potential effects of the Budget on the tax treatment of their disposals.
Business owners who are contemplating a share sale or a business restructuring and who have not yet started the process need to proceed with caution, as anti-forestalling provisions may apply to their transactions. When the government introduced changes to Entrepreneurs’ Relief in March 2020, new legislation included anti-forestalling provisions which meant that certain non-commercial transactions entered into before the Budget date (but in anticipation of the Budget changes) were not effective in crystallising gains under the pre-existing regime. The government may again propose these anti-forestalling rules as well in March 2021 Budget.
For more tax advice and assistance with accounts and to speak to Colin Davison, Managing Partner at Cranleys. 01256 830000