Reducing Capital Gains Tax after cuts to Entrepreneurs’ Relief
The reduction of the entrepreneurs’ lifetime limit from £10 million to £1 million stands out as a headline-grabbing change introduced in the recent Budget, writes Douglas Sinclair.
While relatively few individuals claim the relief each year, for those who qualify it results in very large tax savings (up to £1 million until the recent change). So, with HMRC cutting the level of the relief, what are the other options to reduce tax exposure on business sales?
Make use of multiple allowances
The new limit of £1 million applies per taxpayer rather than per transaction, so if shareholdings can be spread around a family group (e.g. by transferring shares to a spouse) it may be possible to make use of a number of separate allowances and therefore reduce overall tax exposure. For those thinking of undertaking such planning they should remember that, under previous changes to the entrepreneurs’ relief rules, the holding period to qualify for relief was increased from one to two years; undertaking planning in good time is therefore important.
Defer the gain
It is sometimes possible to defer the disposal for capital gains tax purposes and then look to manage the inherent liability over time. For example, it may be possible to take some of the consideration as “loan notes”, with the associated capital gain being deferred until those notes are encashed. Doing this only defers the tax but if the notes are encashed gradually it could reduce overall tax exposure.
Use Investors’ Relief
One unusual aspect of the reduction in the entrepreneurs’ relief allowance is that this was not matched by a similar reduction in the lifetime allowance for “investors’ relief” (which remains at £10 million). Until recently, there has been relatively little focus on investors’ relief but with the reduction in the entrepreneurs’ relief allowance it is likely that taxpayers will look to take advantage of investors’ relief where possible.
Leaving the UK to reduce tax liabilities has always been an option but it is a relatively unpopular one. This is for two reasons. Firstly, until the recent change the tax rate applying on most business sales was very low. Secondly, while leaving the UK may sound like an attractive option on paper, the need to remain non-resident for an extended period in order for such planning to work means it often turns out to be a less attractive option in practice.
While the practical complications of leaving the UK will remain in place, given the greater tax exposure that business owners may face in a sale, it may be that in future, “going on a Sunak cruise” becomes a more common option.
Retain assets until death
While it is the ultimate example of the adage, “never let the tax tail wag the lifestyle dog”, the changes to entrepreneurs’ relief have underlined the fact that for some business owners retaining assets dying while still “in harness” is often the best way to minimise tax.
This is due to a combination of business property relief (which can effectively remove business interests from the inheritance tax net) and the tax-free “rebasing” that occurs on death. While these rules remain in force they provide a way to potentially remove capital-gains tax liabilities altogether if sales can practically take place following a death rather than before.
Douglas Sinclair is a partner in Shepherd and Wedderburn’s Private Client team. For more information, contact Douglas at firstname.lastname@example.org or on 0131 473 5710.
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