As the Spring Budget approaches, there is really only one tax question on entrepreneurs’ lips, “Will anything happen to capital gains tax rates?”
The most likely answer in the short-term is no. In recent years, there has been widespread speculation that capital gains tax rates might increase, causing panicked business owners to accelerate transactions to sell their companies. Compared to the frenzied times ahead of previous Budgets, business owners seem positively serene at the moment about the risk of a capital gains tax (CGT) rate rise.
However, such calmness may be short-lived before the storm of a general election that is looming larger on the horizon. Many business owners have concerns that both major political parties have been ominously silent on the prospect of increases to CGT rates. Whilst there may not be short-term concerns over any changes, entrepreneurs planning a transaction to take place in the next two years are beginning to worry about what the future might bring.
In particular, there is widespread concern amongst entrepreneurs that a Labour government may re-examine the proposals made by the Office of Tax Simplification which recommended that CGT rates should be more closely aligned with income tax rates.
Such a move could have a dramatic effect on the Treasury’s CGT receipts. In a Freedom of Information Request submitted by RSM UK, HMRC has disclosed the number of individuals in the UK who realised substantial capital gains from the sale of shares in unlisted companies.
HMRC has provided the details in the following table which shows the gross capital gains reported by individuals on their tax returns in respect of sales of unlisted shares in the 2018/19, 2019/20 and 2020/21 tax years.
|Year of disposal|
|Total gains from unlisted shares||Number of individuals in 2018/19*||Number of individuals in 2019/20*||Number of individuals in 2020/21*|
|Between £5m and £10m||250||300||450|
|Between £10m and £20m||100||150||200|
* The number of individuals are rounded to the nearest 50.
The above statistics show that there was a large spike in transactions in the 2020/21 tax year. This will have been driven by both market conditions, as there was a spike in Private Equity activity during this year, and the fear factor of CGT rates going up.
Allowing speculation around CGT rate rises to run riot can be a useful tactic for a Chancellor hoping to bolster tax receipts. The wider CGT statistics published by HMRC highlight that 45% of CGT revenues in 2020/21 came from those who had chargeable gains of £5m or more, with this group representing less than 1% of CGT taxpayers.
As can be seen from the data released by HMRC, just 150 individuals in the 2020/21 tax year had chargeable gains from the sale of unlisted shares over £20m. As a minimum, these 150 individuals will have accounted for £3bn of chargeable gains. Assuming the gains were fully taxable at 20%, these 150 individuals alone would have accounted for at least £600m of CGT receipts.
We are likely to see the trend of CGT revenues reaching record levels continuing in the near future, provided the deals market does not significantly decline over the next year or so. What happens after a general election and in particular, Labour’s stance on CGT rates, could have a significant impact thereafter. As can be seen, even if a small minority of CGT taxpayers decide not to sell up, it could have a dramatic impact on the Treasury’s tax revenues.