Commercial Law

Potential changes to capital gains tax could affect business owners

January 29, 2021

As the next budget on 4th March grows ever closer analysts and financial commentators are speculating on how the Chancellor will begin to recoup the costs of the Covid-19 pandemic. Many are focussed on the changes to capital gains tax which have been proposed by the Office of Tax Simplification (OTS), published in November 2020. 


The Report on Capital Gains Tax Reform recommends that capital gains tax become closer aligned to income tax. This recommendation could have a significant impact on business owners who are looking for a near-term business exit. 

At present, basic-rate taxpayers pay 10% capital gains tax on assets and 18% on property, with higher-rate taxpayers contributing 20% on assets and 28% on property. If an alignment does happen, some worst-case scenarios have included potential tax rises from 10% to 45%. Put figuratively, this would increase the tax on the sale of a business worth £1million from £100,000 to £450,000. 


Additional recommendations made by the OTS include reducing the CGT tax exemption which is currently set at £12,300. Commentators views on how far it will be slashed to vary from £2000 to £5000. Alongside this, it has also been recommended that Business Asset Disposal Relief and Investors’ Relief be abolished. 


What does this mean for business owners?

For anyone who owns a business or who has significant assets it is a good idea to seek advice from reputable advisers. If you are the owner of a limited company or are considering a business exit in the near future, you may also want to invest some time in revisiting shareholder agreements or a potential partial sale in order to negate CGT liabilities. 


At the moment, while it does still remain speculation, we like to go buy the motto “there’s no smoke without fire” and err on the side that a Capital Gains Tax increase is less a matter of if and more a matter of when. The biggest questions will be “how much will the rise be?” and “will it be implemented on budget day or at the end of the tax year in April?”.


With that in mind, we believe it’s far better to be prepared and recommend that any business owners seek expert financial and legal advice to assess what their position will be after the budget.