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Potential CGT and IHT changes ahead


Potential CGT and IHT changes ahead

This year’s Autumn Budget could be the most interesting in recent times as the Chancellor looks to set out his plans to help the economy recover from the damage inflicted by Covid-19, with measures to reduce the budget deficit, boost consumer spending and prevent a significant rise in unemployment.

The Chancellor is expected to reduce the budget deficit by introducing some tax increases rather than spending cuts and it appears the “wealth taxes” of inheritance (IHT) and capital gains tax (CGT), as well as corporation tax could be in line for tweaking, either in the Autumn or from April 2021.

The Chancellor recently requested the Office for Tax Simplification to conduct a public consultation on potential changes to CGT, which may result in changes beyond merely an increase in the tax rates. This follows a similar consultation last year covering IHT where changes have been predicted for many years.

While there is no guarantee of when or what changes will be implemented, there are proactive steps taxpayers may want to consider, particularly those who are already in a sale process, or are considering taking steps to restructure their tax affairs, to reduce the risk of being detrimentally affected by changes to future legislation, or by increases in tax rates.

Currently, tax rates on capital gains are significantly below rates for income, being as low as 10% on gains on disposals qualifying for Business Asset Disposal Relief (Entrepreneurs Relief) or 20% for most other disposals, compared to income tax rates of up to 45%, with national insurance contributions on top.

It is thought that these favourable CGT rates are unlikely to remain as low as they currently are. Taxpayers may wish to consider taking advantage of current rates in line with their long-term objectives for achieving their ‘Big Picture’. If a disposal to a third party is underway, then it would be prudent to accelerate the sale process, so the disposal takes place before any changes. On other hand, if a transaction relying on a CGT relief is envisaged (e.g. incorporation relief on the transfer of a trade or a business to a company or a group restructuring) then this process could be accelerated to ensure the reliefs will be available.

In addition, Taxpayers could consider other strategies for ‘banking’ existing CGT rates, if the approach fits in with their long-term objectives. This could include:

• Gifting shares to family members or a trust,

• Sale of business to family, management or a trust set up for the benefit of employees.

Currently Taxpayers benefit from favourable IHT reliefs on shares in trading companies including gifts of those shares to the next generation. It is possible that this relief could be significantly amended or even withdrawn. Taxpayers could attempt to ‘lock in’ these reliefs by making gifts of shares to the next generation, either directly or to a trust for their benefit. This could be done in such a way that retains control over the entity, but significant value is now held by the following generation so deferring the IHT problem, preserving family wealth and saving significant tax.

As ever, it is important that “the tax tail shouldn’t be allowed to wag the commercial dog”. Any action taken now needs to be considered very carefully taking all factors into consideration.

At Creaseys we work closely with our clients to help them understand their long-term objectives and consequently their ‘Big Picture’. This includes assessment of likely changes to the tax environment and action that could be taken to mitigate these changes. We help our clients to understand the implications of taking no action compared to the alternatives, taking into consideration the tax and commercial implications.

If you would like to discuss your particular circumstances and the impact of the possible changes to the CGT and IHT tax regimes, please contact us.