TT331: Capital Gains Tax (“CGT) planning opportunities in anticipation of increased rate of CGT

October 01, 2020

The press has been rife recently with speculation that rates of taxation and in particular CGT are set to rise imminently to fund the costs of Government support for the economy during the COVID-19 pandemic.

The November budget has been abandoned in favour of a March 2021 budget so it is unlikely we will know what the Chancellor has in mind for tax rates but we do know that CGT reliefs have already been reduced.

In his last Budget (11 March 2020) the Chancellor reduced the lifetime limit on Entrepreneur’s Relief (now renamed Business Asset Disposal Relief – “BADR”) from £10m to £1m.  As such, only £1m of gains on a share disposal would now be taxed at 10% with the balance of any gain being at 20%.

In view of reduced BADR and uncertainty over the tax rate, business owners (particularly those likely to want to sell in the next few years) will want to consider the ways to mitigate against future increases in rates of CGT.

Mitigation strategies

Entrepreneurs Relief – BADR

Whilst it is not possible for anyone to avoid the reduced limit of BADR, it is important to consider giving shares to others who might then also qualify for the relief.

Each individual has a lifetime BADR limit (now £1m).  Spouses are an obvious candidate as a gift of shares to them is not a tax event for income tax, CGT or inheritance tax purposes.  To qualify for BADR your spouse would have to hold 5% of the voting and income/equity rights in the company for a period of two years and be an employee or officer of the company for the same period. Being a company secretary is sufficient for these purposes.

Accordingly, in certain circumstances, it would make sense for a spouse to hold 5% or more of the equity shares and for shares to be transferred to them as soon as possible to get the clock running.

Once an individual qualifies for BADR, they can be given additional shares and those shares immediately qualify for the relief (subject to the lifetime limits).

Family Investment Company (“FIC”)

FICs sometimes known as personal investment companies (“PICs”) come in many forms and have any number of uses.

Introducing a FIC into a corporate structure creates additional flexibility and provides a vehicle through which wealth, particularly that created post sale of a company, which can be managed and distributed around the family.

Typically, an individual would transfer most but not all shares in a trading company to a FIC. Once the trading company shares in the company have been held by the FIC for 12 months the sale of the those shares by the FIC would be exempt from Corporation tax as a result of Substantial Shareholding Exemption (“SSE”).

SSE was introduced in 2002 and allows the disposal of share interests of 10% or more in trading companies to be tax exempt.  SSE therefore allows the FIC to sell the sale shares tax free and hold the proceeds for further investment to generate income and further gains.  This effectively allows the gain on the sale shares to be rolled over and a fund created for future investment. The FIC might be liquidated at a future time when CGT rates are more appealing.

There are other consequences of the use of FICs so their use needs to be considered as part of more comprehensive tax advice. 

Becoming non-UK Tax Resident 

Not paying any UK tax on the sale of shares can be achieved by becoming non-UK resident. A disposal of shares in the tax year after an individual has ceased to become UK resident will be exempt from UK CGT if the individual remains non-UK resident for a period of 5 years. Becoming resident in the UK within 5 years triggers the gain and taxes will be paid as though the gain was made on the first day of a return to the UK residence.

At first this might be attractive, but there are always family and probably business considerations which make this difficult. Families do not always want to relocate, there might be children to educate, grandchildren on the way etc.  On the business side, you may need to work in the business for a period post sale.

Planning such a disposal and relocation abroad takes time to organise and establishing a future tax residence abroad where you would choose to both live and pay low tax rates needs proper consideration.

Creating a sale now to lock in tax rates

There are a number of strategies that can be used to create a disposal of shares now that allow the taxation to be paid over a number of years whilst fixing in the current tax rates on an actual or contingent basis.

Acquiring entities could include companies and Trusts and tax liabilities might be spread over up to eight years.

Summary and moving forward

Whether rates of CGT will increase significantly or at all and whether or not BADR will survive the next budget or the budgets coming in the next few years is difficult to predict although the general feeling is that taxation in the UK must rise.

Planning the tax aspects of sale is much more important now given that BADR and the ability to pay the so called “10% rate” has been significantly reduced. Immediate advice around spousal shareholdings should be taken although the total value of this relief currently is now limited to £100,000 (£1m x (20% – 10%)). Further strategies may then be required should CGT rates be increased to fund the ongoing COVID-19 crisis.

Please contact your dedicated Barnes Roffe partner for any further advice on this topic.

 

 

 

 

Talk to Barnes Roffe today
Share this page:
Contact Us
ICAEW The Chartered Institute of Taxation ACCA IPG IR