With the Autumn Budget fast approaching, there is widespread speculation that some potentially significant changes to the Capital Gains Tax (CGT) regime may be on the horizon, set to be unveiled in Rachel Reeves’ first Budget as Chancellor on 30 October 2024.
Roger Phillips, Tax Partner at PM+M, shares his thoughts on what could be announced and offers guidance on how business owners, investors, and shareholders can prepare for the potential changes.
Capital Gains Tax – what could change?
For several years now, raising the rate of CGT has been suggested as an effective way to increase tax revenues (you may remember a similar situation in 2021, which didn’t materialise). However, 2024 feels different. The annual CGT exemption has already been reduced from £12,300 in 2022/23 to just £3,000 this year – many therefore believe that significant changes may be on the horizon.
One area that may be under review is Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), which currently offers a flat 10% CGT rate on the disposal of qualifying business assets, with a lifetime limit of £1 million. If this is reduced, or removed, it could have a considerable impact on business owners planning to sell their company or business assets.
Deal completion – race against time
Capital appreciation on assets typically accumulates over time, with tax liability triggered upon disposal. Should the government raise CGT rates – rumours suggest a potential increase to 28% may be on the cards, or even higher to align with income tax rates – the tax burden on disposals would significantly increase. Given that nobody knows what will happen (yet) – the lack of information creates panic, as markets prefer certainty. The result of which is a rush to close deals before 30 October. By being silent on the matter, there is no doubt that the government will have raised a significant amount of CGT revenue already, even before Budget day.
Although a CGT increase could be phased in or apply in the next tax year, many are unwilling to take the risk. In the past, significant tax increases have sometimes been implemented immediately, which only adds to the pressure to complete transactions now. An increase in CGT would affect a broad range of asset holders, including business owners, shareholders, property investors, and landlords.
How can I prepare – move offshore or sit tight?
Despite best efforts, not all deals will make it across the finish line in time, whether that’s down to starting too late, unforeseen complications, or buyers leveraging the pressure on sellers.
If CGT rates increase only marginally, the market will likely absorb the change without major disruption. However, if the increase is substantial, as some are predicting, it could slow the M&A market in the short to medium term.
Sellers may choose to hold onto their businesses and assets, waiting for a potential new government with a ‘more favourable’ tax policy – although clearly they will be waiting for some time for this – with no guarantees of more favourable treatment. Others may consider moving abroad, severing their UK residence and avoiding UK CGT by staying abroad for more than five years (although this wouldn’t apply if people were looking to escape CGT on property).
Managing uncertainty – a balanced approach
Attempting to anticipate changes in the Autumn Budget and making financial decisions based on speculation is inherently risky. That said, it’s easy to understand why many are taking a “better safe than sorry” approach. However, it’s crucial to ensure that decisions are made with sound commercial judgement rather than fear of potential tax increases.
Flexibility is key
If you are in a position to remain flexible and adaptable, there’s no reason why the upcoming changes should derail your long-term goals. While it may be tempting to rush into decisions, a balanced, well-informed approach can help you navigate the changes ahead and continue towards the success you have worked so hard to achieve.
As the Autumn Budget approaches, the next few weeks will be crucial for those seeking to secure favourable tax outcomes ahead of potential CGT hikes. Regardless of the outcome, preparation and professional advice are the best tools to ensure your financial objectives remain on track.
Get in touch with Roger Phillips to discuss your circumstances in more detail by clicking the button below.
