Iain Young: Looking ahead to a year of (tax) change
Iain Young considers the year ahead in tax.
One of the most hackneyed phrases found in articles written by lawyers is that in this world nothing can be said to be certain, except death and taxes.
If 2020 will be mostly remembered for death, in the shape of the Covid-19 pandemic, then 2021 is likely to be remembered for changes to the tax regime, brought about to help balance the books as a result of the sustained government spending required to see the economy through lockdown with the least possible damage.
For a good number of years now it has been beneficial for those who are extracting cash from their businesses to have that cash classified as capital rather than income. This favourable capital gains tax (CGT) regime has been described as encouraging entrepreneurship and rewarding risk taking in the pursuit of wealth.
Today in the UK the top rate for income tax is 40% (41% in Scotland) whereas the top rate for CGT is 20% and in many cases upon the sale of a business the seller only pays CGT at 10%. The attraction is therefore very clear. Furthermore, the existence of various capital reliefs such as Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), Roll Over Relief, relief on a solvent winding up and Hold Over Relief all encourage the sale of businesses, with the sellers knowing that their tax treatment will be favourable.
There has been much discussion in the press of late, however, about a narrowing of the gap between CGT rates and income tax rates. It is almost inevitable that this narrowing will occur by an increase in CGT rates rather than by a reduction in income tax rates.
Rumours have suggested that any changes will take effect either from the beginning of the next tax year (6 April 2021) or immediately following the Spring budget (currently scheduled for 3 March 2021). For business owners or shareholders wishing to extract value from their investments the window to achieve that at a preferential tax rate is narrow.
If you are looking to sell your business, now is the time to start that process. Similarly, if you wish to extract cash via a voluntary liquidation or other reorganisation there is a need to move swiftly. Bank interest rates are currently at a historic low. For successful and profitable businesses, banks are still prepared to make debt finance available. That debt finance can be used as a direct replacement for equity finance, thus allowing the extraction of cash from a business under the CGT regime.
Iain Young is a partner at Morton Fraser