Capital gains tax is in the cross hairs of chancellor Rishi Sunak’s aim and could be subject to some major changes, one being business assets disposal relief – previously called entrepreneurs’ relief. It was only changed last year, but that hasn’t stopped the Office of Tax Simplification continuing to gun for it.
A quick recap of BADR if you need one: you will only pay 10 per cent CGT on disposal of a qualifying business asset. If you are disposing of company shares or securities, its main activities must be trading (for example, not an investment business) or it should be the holding company of a trading group.
You have to be an employee or director of the company, or of a company in the same group. What’s more, you should have owned at least 5 per cent of the shares and voting rights in the company, as well as at least 5 per cent of its profits on distribution, assets on winding-up or disposal proceeds if the company is sold.
You must have fulfilled these conditions for at least two years up to the date of the disposal. There are various special rules if you acquired shares under an enterprise management incentive arrangement.
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If you are selling all or part of an unincorporated business, you must have been a sole trader or business partner and owned your interest in the outfit for at least two years.
You can claim BADR many times and there are no age qualifications, but there is a limit to the total value of gains to which the relief applies. This cumulative lifetime limit is now £1m – right up until the current tax year, the ceiling was £10m but chancellor Sunak changed it in his March 2019 Budget.
Now, the OTS is recommending BADR should be further restricted by:
- Increasing the minimum qualifying shareholding to 25 per cent of the company instead of the current 5 per cent.
- Raising the minimum holding period of the shares or business assets to 10 years.
- Reintroducing a minimum age limit – possibly linked to the lowest retirement age under pension freedoms (i.e. currently age 55).
These proposals are all in the context of other recommendations, including the possible alignment of CGT and income tax rates, a substantial cut to the annual exempt amount, removal of the uplift of values on death, rebasing assets values to 2000, and extending holdover relief to more assets.
The OTS case for further restrictions on BADR is mainly based on its alleged incentives for taxpayers to distort their behaviour to avoid tax. The OTS is also of the view BADR does not incentivise entrepreneurs to set up new businesses.
The history of BADR is checkered – as is the whole CGT record. Back when CGT was first introduced in 1965, there was a tax relief for business assets called retirement relief, which relieved from tax some of the gains on the disposal of business assets when people reached retirement age, regardless of whether they actually retired.
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This was then replaced by taper relief and then, in 2008, Labour chancellor Alistair Darling introduced entrepreneurs’ relief – with its generous £10m lifetime limit on qualifying gains and no age qualification. The idea was to encourage serial entrepreneurs.
The case for BADR is that it is an effective means to stimulate risk-taking. In fact, little or no serious research was carried out before the introduction of entrepreneurs’ relief in 2008 or in 2019 when it was cut back and even now when it is under attack again. Time and again chancellors, and now the OTS, talk of incentives with hardly any evidence to back their claims one way or the other.
The OTS does consider there is a strong case for the existence of a relief for retiring business owners as an alternative to a pension. So, if chancellor Sunak does follow its recommendations, we could swing back to the features of the old retirement relief.
One consequence would be that business owners get incentivised to hang onto their businesses, in many cases long after they should have sold them. And they will be encouraged to consider their business as their pension – hardly a recipe for retirement security.
If he increases the minimum holding to 25 per cent, thousands of smaller shareholders will be cut out of the relief.
The chancellor should pause before making any further changes to BADR. In considering its recommendations, the OTS drew on data from 2016/17 when a high proportion of the CGT paid related to assets that would have qualified for entrepreneurs’ relief. But that was when it covered gains of up to £10m – and now with the limit now a 10th of that, the situation is bound to have changed very markedly.
CGT is likely to change in the near future and the chances are that rates will go up in the wake of Covid-19. The pandemic has accelerated many developments in financial services; one of them is that advisers will be urging clients to consider making disposals sooner rather than later.
Danby Bloch is chairman of Helm Godfrey and head of editorial strategy at Platforum
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