"Simplifying by Design" - cutting through the speculation about CGT – why I’d not bet against it going up – and why it might not all be bad for (some) business owners
23 November 2020
As if the Chancellor’s need to raise tax to pay for his vigorous shaking of the magic money tree this year wasn’t enough to fuel the fear of CGT rises in the Spring the recently published Capital Gains Tax review by the Office of Tax Simplification (entitled Simplifying by Design) makes it look very likely. Also Capital Gains Tax for business owners has been about as benign as it was going to get for some time now.
Some themes emerge from the conversations I’m having with business owners, funders and other advisers at the moment.
It’s not a vote loser and yet the Tories would never prejudice entrepreneurship
That’s an interesting comment – and it’s probably true that the average voter won’t weep for too long at the thought of business owners paying more tax. And yet it’s successive Conservative chancellors who’ve advocated that income tax and CGT should be at similar rates, while in contrast it was Labour under Gordon Brown which introduced the concept of Entrepreneurs’ Relief. Quoting below from the OTS report:
“When the tax was introduced in 1965, Chancellor James Callaghan said that ‘…gains confer much the same kind of benefit on the recipient as taxed earnings… [and]… the present immunity from tax of capital gains has given a powerful incentive to the skilful manipulator.’ 1 In 1988, Chancellor Nigel Lawson said, when aligning the rates with those for Income Tax, that there is ‘little economic difference between income and capital gains’ so income and gains should be treated along similar lines.2 In 1998, Chancellor Gordon Brown said, when replacing indexation allowance with Taper Relief, that the ‘capital taxation system should better…reward risk taking and promote enterprise.’ 3
It is needed to pay off the national debt
It’s true that the Chancellor needs to raise more cash from somewhere. But CGT is a drop in the ocean. As it stands right now raises that national debt of 2.08Tn is 250 times the annual take from CGT. So using CGT to pay of the national debt is like bailing the Titanic with a teaspoon.
The system if full of distortions so it needs tidied up
Its true that there are lots of distortions and complexities in the system. And that’s what the OTS report ostensibly sets out to address. For example, gains on different types of asset, and differences in treatment between IT v IHT v GGT. An interesting one highlighted in “Simplifying by Design" is the distorting effect of the annual GCT exemption. They show a distribution of the frequency at which individual’s realise certain levels of capital gain each year. It has a huge spike generated by people making use of their annual exemption.
A new focus on relief for retirement
This is why it’s not all bad. The OTS suggest that for business owners who plan retirement there’s a strong case for a CGT relief. It says that Business Asset Disposal Relief (the new name for what’s left of Entrepreneurs’ Relief) is too broad to do this and needs to be “reformed”.
OTS makes a few suggestions:
- That the Government consider increasing the minimum qualifying shareholding to 25% so that relief goes to owners managers and not to passive investors
- Increasing the qualifying hold period to 10 years to direct relief only to people who have built up their businesses over time
- Reintroducing an age limit perhaps linked to age limits in pension rules to reflect the intent that it should be a retirement focussed relief.
What conclusions to draw?
If you’ve held more than 25% of a business for more than 10 years, are of pensionable age and are headed for retirement there are reasons to be cheerful. For those who are younger, built their business more quickly, or have a smaller shareholding it’s time to get ready for a much more fearsome CGT regime. More about Succession Planning for that age group on the PEM Corporate Finance website