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Tax-efficient capital gains may be on the way out‚ but there's still time to maximise the benefit
By Steve Markey, Associate Director at Leonard Curtis, providers of the Lifecycle accountancy network
It has been widely reported that Chancellor Rishi Sunak is considering changes to Capital Gains Tax (CGT) as a way of generating much-needed income at a time when the country needs all the money it can get to help balance the books after the huge amount of government support during the COVID-19 pandemic.
In July 2020 he asked the Office of Tax Simplification (OTS) to review CGT. Their report, entitled Simplifying by design was published on 11th November 2020 and considered four key areas:
- CGT rates and boundaries
- The annual exempt amount
- Business reliefs
- CGT interaction with lifetime gifts and IHT
There have historically been concerns that, because CGT rates are lower than Income Tax rates, it drives behaviour encouraging people to organise their finances in such a way as to minimise tax by having it treated as capital rather than income. The OTS recommendation is that, in order to address this, the government should consider bringing CGT rates more in line with Income Tax.
Aligned with this is a reduction in the annual Capital Gains exemption currently £12,300 as it is suggested that many investors sell assets each year capped at that level as a form of tax-free capital sale. The OTS recommend that the annual tax-free allowance is reduced to between £2,000-4,000.
The report makes other recommendations such as proposing changes to the reliefs available to business owners and looking at how Capital Gains interact with Inheritance Tax.
It is important to note that these are only recommendations and that wholesale reform of CGT is not something that could be achieved overnight. However the Chancellor will be under pressure to generate income from somewhere when he delivers his next Budget on 3rd March.
With this in mind, an increase in CGT rates and a reduction in allowances may be a quick fix and one which could have significant implications for anyone thinking of selling a business or retiring any time soon.
At Leonard Curtis, we work with many business owners who want to close a company via a solvent, Members Voluntary Liquidation (MVL) because, under tax legislation, distributions of cash and other assets made by a Liquidator in an MVL are generally treated as capital rather than income and therefore benefit from lower tax rates. Capital Gains can be further reduced where Business Asset Disposal Relief (the successor to Entrepreneurs Relief) applies.
Time may be running out
So, if any of your clients are considering a solvent liquidation in order to realise value from a company at the end of its useful life on the basis of more attractive CGT rates and allowances, then it may be advisable to act sooner rather than later in case those rates increase and allowances come down after 6th April, or even sooner we have seen situations in the past where changes announced in the Budget have been effective on the day and 3rd March isnt that far away!
Who could benefit from an MVL
In the SME arena where Leonard Curtis operates we tend to work with accountants and their business owner clients who are retiring or have sold the business through the limited company. Ites also an effective way to wind up businesses set up for a specific project that has been completed, when the profits and accumulated reserves must be extracted from the company by its shareholders.
MVLs also remain a popular route for those accountants whose freelance contractor clients need to wind up their personal service companies as a result of the delayed changes to IR35 which will now be rolled out to the private sector in April.
Adding value and expertise
Whilst many MVLs can be quite straightforward, there can be a number of complicating factors. This is why it is important to take specialist advice before beginning the process. At Leonard Curtis, the specialist MVL team works in partnership with accountants to ensure that the best possible solution is secured for their clients.
Under the current CGT regime, MVLs continue to be a tax-efficient way for shareholders to extract value from a company but this may not be as attractive in the future. So if you have any clients who would like some advice then they havent got long so dont hesitate to get in touch.
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