How business owners can plan for a Labour CGT surprise

Few topics have prompted as many evasive manoeuvres from Labour politicians during the election campaign as the question of potential capital gains tax (CGT) rises during the next parliament. The standard retreat has been to the safety of the manifesto and that nothing in the Labour party’s plans requires any additional tax to be raised. 

That effective silence is certainly not golden for business owners and there remains a significant disquiet amongst many that a hike in CGT rates may only be a matter of time. Indeed, recent reports suggest the new chancellor is already facing pressure to consider raising CGT rates. 

That is despite the fact that there are good reasons why a CGT rate increase did not feature in the Labour manifesto, as highlighted in our previous Weekly Tax Brief edition on the subject. In addition, HMRC’s latest estimates suggest a 10% increase in the higher rate of CGT could result in a loss of tax revenues of over £2bn in the 2027/28 tax year. 

So what steps could business owners consider in response to a potential increase in CGT rates? We consider some of the options.

Accelerate a sale or wait it out

When CGT rate changes have been announced in the past, they have often taken effect from the next tax year, giving a potential opportunity for taxpayers to accelerate a disposal to ‘bank’ the current rate. There is however the possibility that rules, commonly known as ‘anti-forestalling’ measures, could be introduced to counter this. In addition, whilst tax may be a factor in such decision making, it may not be the best option commercially. An alternative is of course that taxpayers simply do not sell their assets and simply wait for the rates to change again, as there have been various changes made by different governments over the last 16 years or so.

Tax efficient investments

The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) offer valuable reliefs to incentivise investment into early-stage businesses. These include the opportunity to defer or reduce, under EIS and SEIS respectively, certain capital gains that have already been crystallised. Disposals of shares that qualify for EIS and SEIS can also benefit from an exemption from CGT altogether and, whilst uncommon, it is sometimes possible for founders of companies to qualify for this if the circumstances allow.

The Scandinavian model

Countries such as Denmark and Norway have relatively high tax rates for individuals selling shares and lessons can be learnt from their approach to mergers and acquisitions. Whilst the individual tax rates in those countries for share sales are broadly aligned with income tax rates, a company selling shares may not suffer any tax at all. If a similar approach is applied to CGT rates in the UK, this might result in more deals structured so that it is a company undertaking the disposal and benefitting from a lower tax rate. Companies can actually presently suffer no UK tax on disposals of shares if the Substantial Shareholding Exemption applies.

Employee Ownership Trusts (EOTs)

A sale of shares in a company to an EOT has been increasingly popular in recent years, in some part due to the potential of no CGT being payable on the proceeds. It is not an appropriate route for all but it is likely to become even more popular if CGT rates increase. The key question is whether an increase in CGT rates would also apply in some way to EOT transactions.

Non-residence

Leaving the country entirely is often considered the last resort but significant changes to CGT could light that fuse for some. If CGT rates were aligned with income tax rates in the UK then many countries in Europe could represent an attractive destination. It is not uncommon for business owners preparing for a disposal to consider their residence position and it can be possible to break UK tax residence for CGT purposes in the middle of a tax year, ahead of a disposal. Whilst existing ‘temporary non-residence’ rules present a hurdle for this kind of planning, an ‘exit charge’ tax could be introduced to further protect tax revenues when individuals become non-UK resident, something that could have far-reaching consequences in itself.

Ultimately, the paradox facing Rachel Reeves is that the threat of a CGT rate rise could actually generate more in tax revenues than a rate rise itself, as many business owners will undoubtedly take their own steps to limit the impact of such a move.