A focus on capital taxes is an unwelcome Christmas gift for entrepreneurs

Taxpayers are heading into 2023 knowing that income tax is on the rise, but changes to capital taxes are also likely to remain on the agenda. Following a review by The Equality Trust, wealth inequality in the UK is widening and there are renewed calls from the think tank for a progressive wealth tax. Recent reports indicate that wealth tax implemented in Norway has led to emigration of wealthy individuals, and the challenges of structuring a wealth tax – one off or otherwise – have meant that in the past this has been parked indefinitely by the Treasury.

With 2023 just around the corner, the Sunak regime is likely to be turning their attention towards the next general election. The anticipated course of action is change to the current capital taxes regime – likely concentrating on Capital Gains Tax (CGT). The disparity between income tax and CGT rates has already been the focus of political debate, and the chancellor has indicated the likely direction of travel by already significantly reducing the annual exemption for all taxpayers in the recent Autumn Statement.

In the context of asking those with more to pay more, the rate of tax applied to company sales has been the subject of several reports. For those who own a business, an exit may be some time away but there are steps which can be taken now to restructure and potentially mitigate a CGT liability in the future.

A restructure of the business to include a new holding company can give more flexibility for the vendor on the future sale, and provided the relevant criteria are met, the sale of a trading subsidiary by the parent company can fall within the substantial shareholdings exemption. This means that the sale of the company could be tax free at the point of sale. The proceeds will remain in the parent company, but this gives flexibility for the shareholders to defer a tax liability until they distribute funds, or they arrange their own personal affairs.

For clients whose longer-term plans include de-risking their investment, and potentially a partial disposal of their company, the current CGT rates may also present an incentive to take some cash off the table and pay tax at a maximum of 20% (half that where they qualify for Business Asset Disposal Relief). This relies on tax anti-avoidance rules not applying that can effectively treat the cash proceeds like a dividend. Confirmation of this will often be sought from HMRC in advance in an application for clearance for the transaction.

As the new year is likely to see more changes in the Spring Budget, business owners should make a full review of their corporate structuring and future plans top of their list of new year’s resolutions ahead of an expected spring clean of the tax regime by the Treasury.