Date02 Oct 2020
CategoryTax, Private Client
Capital gains charges arise for business owners when they sell or gift interests in their business or in an asset used in the business.
Business asset disposal relief (formerly “entrepreneurs’ relief”) reduces the rate of tax payable, other reliefs delay the tax charge by holding or rolling the gain over.
Currently assets inherited on someone’s death are treated as acquired at their market value at the date of death (“capital gains uplift on death”). This capital gains uplift on death can mean that held-over or rolled-over gains never come into charge.
In July 2019, the OTS Inheritance Tax Review identified that the capital gains uplift on death did not encourage the passing on of assets and businesses during a person’s lifetime and so hindered business succession. Instead they proposed that the capital gains tax uplift be removed on assets covered by inheritance tax reliefs or exemptions on death. The tax and accountancy institutes and business thinktanks appear to support this change.
It is possible, therefore, that the capital gains uplift on death will disappear next year.
This change along with a possible rise in capital gains tax rates should be considered when deciding whether to take advantage of any roll-over or hold-over reliefs. Additionally, any recent claims should be revisited, and consideration given to disapplying reconstruction relief where shares have been issued in lieu of cash consideration.
There are still calls from some parties for business asset disposal relief (formerly “entrepreneurs’ relief”) to be scrapped on the grounds that it does not encourage entrepreneurship and can be open to abuse. We, however, consider that this relief will remain in some form for trading businesses. Whilst there are calls for reliefs that are given at the beginning of the business cycle to encourage entrepreneurs, the smaller lifetime limit (now £1 million compared with £10 million previously) reduces cost of the relief and the rebranding reflects that there is still a place for a tax break at the end of a business.
What does this mean for you?
Take time now to consider your plans for your business. Do not assume that popular tax reliefs will apply to you or that the current low rates of capital gains tax will continue. Consider a meeting with us to discuss your succession plans. Is this the time to evaluate exit plans to secure current rates and reliefs? We can also check if the documentation you currently have in place (for example wills and partnership agreements) reflects your wishes and discuss options to mitigate your exposure to future tax charges.
Consider recent transactions where you may have “rolled-over” or “held-over” gains, should these decisions be revisited? Did your previous tax planning include holding over gains against shares that qualify for business property relief in the expectation that these gains will be “washed out” on your death?