A report by Office of Tax Simplification (OTS) commissioned by the Chancellor Rishi Sunak has proposed bringing the rate at which CGT is paid into line with income tax, reducing the annual allowance, restricting the reach of Business Asset Disposal Relief (the successor to Entrepreneurs' Relief) and abolishing Investors' Relief altogether.
Capital Gains Tax is broadly a tax on the gain realised on the difference between the purchase price of an asset and its value on sale, minus any allowable expenses and losses.
Higher rate taxpayers pay any CGT entirely at the higher CGT rates: 28% for gains on residential property disposals and 20% for gains on other assets. Every individual is entitled to an annual exemption to set against all gains made in a tax year, the annual exempt amount is £12,300 for the 2020/21 Tax Year.
Since its introduction, CGT has always given specific relief for the disposal of certain business assets. Currently, where there is a disposal of business assets, eg: shares owned by an individual for more than two years in a trading company of which the individual owns more than 5% of the ordinary share capital of the company, will qualify for Business Asset Disposal Relief, reducing the rate of CGT payable to just 10% subject to a lifetime limit of £1million of gains.
Investors’ Relief was announced in the 2016 Budget as being an "extension of Entrepreneurs’ Relief" for external investors in unlisted trading companies that also operates by applying a 10% CGT rate on the disposal of qualifying shares after a minimum holding period of three years subject to a lifetime cap of £10 million.
For companies offering shares or options to their employees as incentives, the arrangements can generally be structured so that no income tax is payable on the grant of the incentive with the uplift in value subject to CGT on a future disposal.
If held for the qualifying two year period, most share incentives will qualify for Business Asset Disposal Relief, meaning that an employer effectively gives value to an employee with a 10% tax rate rather than up to 45% paid on employment income.
The proposals include:
Those looking to benefit from existing reliefs may, where appropriate, seek to bring forward a disposal so that this is made before the next Budget due to take place on 3 March 2021.
Although there is no suggestion that such wide reaching changes will be rushed through before next year's Budget, it is possible that there will be a withdrawal of Business Asset Disposal Relief and Investor's Relief.
For those with entitlements to shares through existing share schemes, it is hoped that changes would allow for a transitional period, so that those with existing awards would be taxed as originally anticipated. Until such time as there is more detailed consultation, employers seeking to incentivise employees should still consider share schemes as a viable option.
This article was originally published by Business Leader.