Between March and October 2020, the UK borrowed almost eight times as much money as it did in the same period in 2019, bringing public sector debt to over £2,000bn. This borrowing was essential to support the country through the COVID-19 pandemic, but we’re likely to feel its shockwave for years to come, says David Eaves, director, Christie & Co.
In order to reduce the deficit and slow the rate of additional borrowing, in July 2020, the UK Chancellor, Rishi Sunak, requested the Office of Tax Simplification (OTS) to carry out a review of Capital Gains Tax. A report was subsequently published the following November which made several recommendations and highlighted specific policy choices for the UK government to make.
Early this year, a second report will be issued detailing technical considerations and admin issues, and, at the Spring Budget in March, the Chancellor will announce which, if any, changes are to be implemented.
Key recommendations from the government’s report:
- Consider more closely aligning Capital Gains Tax rates with Income Tax rates.When most owners sell their business, the capital gain derived from the sale is added to any other sources of taxable income to determine the rate at which tax will be paid and, in the vast majority of circumstances, this will place an individual within the higher or additional rate tax band. At present, capital gains are taxed at 20% for a higher or additional rate taxpayer. If this were aligned to the income tax rate paid on salaried income, the tax paid on capital gains could increase to 40% or even 45%. At worst, this could potentially double the tax paid on the sale of your business.
- The government should consider replacing Business Asset Disposal Relief with a relief more focused on retirement. Many business owners have taken advantage of Business Asset Disposal Relief (BADR) – formerly known as Entrepreneurs Relief – when selling their business. This is a tax relief allowing business owners to pay tax at only 10% on the first £1m of gains on the disposal of their business. There is a lifetime limit on the amount of BADR that can be claimed by an individual, and this was reduced from £10m to £1m in March 2020. The recommendation contemplates only allowing BADR to be claimed when an individual is of retirement age and considers increasing the holding period to 10 years (increased from the current two years) meaning that any individuals choosing to sell their business before retirement age or before they have owned the business for 10 years would be unable to avail of this preferential rate of tax, increasing the overall tax burden.
- Consider reducing the Annual Exempt Amount. At present, there is a threshold below which no capital gains tax is paid, similar to the personal income tax threshold – for 2020-21 the figure is £12,300. Clearly, many business disposals are for values far in excess of this but it should be recognised that, however marginal the implications are, reducing the Annual Exempt Amount will mean more tax is paid overall and less proceeds end up with the seller.
David Eaves, director, Childcare & Education, Christie & Co, commented:
‘The sums involved in supporting the economy over the past year are staggering and it stands to reason that a review of national finances is needed in order to recoup, at least in part, the additional borrowing required to support the businesses and individuals through this period. While this is obviously a difficult maze for the government to navigate, any proposed solutions cannot disincentivise investment and entrepreneurship, nor punish nursery owners by imposing a significant additional tax burden if and when they choose to sell their business, both of which these recommendations have the potential to do.
‘The recommendations provided in the OTS report could potentially have far reaching consequences for the childcare sector. Many nursery owners that have sold their businesses in the past have reinvested their proceeds into new ventures, providing new employment and wealth creation opportunities; or alternatively have retired using the proceeds from their sale as a substitute pension arrangement, having invested significant time and resources in growing their business often over many years. If implemented, these recommendations would seriously impact the ability of business owners to do either of these things, stifling entrepreneurship and forcing many nursery owners to revaluate their plans.
‘The key headline that garners the most attention relates to more closely aligning capital gains tax to current income tax rates. The implication here for the vast majority of nursery owners is that they could see their tax bill more than double on a sale of their business compared to the current arrangements. The further recommendation of replacing or abolishing the benefit provided by Business Asset Disposal Relief, which was already slashed from a lifetime limit of £10m to £1m earlier this year, would only serve to further the tax burden.
‘While these are only recommendations at this stage, and nothing is yet set in stone, it is unlikely that the sector will be given a great deal of notice before any changes are implemented, which would likely be as soon as the March 2021 Budget. For business owners who were potentially contemplating an exit at some point in the future, these recommendations may accelerate their plans in order to maximise the proceeds they achieve for selling their business. If these recommendations were to become policy it is important for business owners to consider the implications without delay, before the Budget is upon us.
‘The positive news for owners is that there is currently an abundance of willing buyers in the market seeking to acquire high-quality childcare businesses, both in terms of new entrants and existing nursery operators with plans to expand their portfolios. At Christie & Co, we are in continuous dialogue with the key stakeholders in the sector and remain best placed to support owners whatever their plans may be.’