The autumn statement what can we expect - a rise in capital gains tax?

The Government will deliver its first autumn statement on 30th October but what can businesses expect?

The mergers and acquisitions market has been busy, because there is a fear that capital gains tax will be increased.

In this podcast John talks to David Evans from Sedulo about the autumn statement and capital gains tax.

Transcript

Hello and welcome to the Deal Lawyer podcast. I'm John Andrews. Today we're going to be discussing the current topic of capital gains tax. As I'm sure many of you will be aware, the Chancellor is due to deliver an Autumn Statement on the 30th October and a lot of speculation about what that's going to contain. The mergers and acquisitions market has been particularly busy the last few months amongst speculation that the rates of capital gains tax or CGT as it's known, will be increased.

00:00:35:09 - 00:00:55:23
Unknown
And this is a topic which is going to be of interest to anybody looking to sell a business, particularly if they're looking to sell a limited company. And I'm joined today by David Evans, who is the head of private client at Sedulo accountants. David, welcome to the podcast. Hi, John. Nice to be here. Nice to meet you too, David. 

00:00:55:23 - 00:01:20:19
Unknown
David, Just tell me a little bit about Sedulo just before we kick off into the world of CGT. Yeah, of course. So we're an accounting firm we'd look after, I suppose most things you'd expect an accountancy firm to look after, along with a few few other bits and pieces that you might not expect an accountancy firm to deal with, like wealth management.

00:01:20:21 - 00:01:44:10
Unknown
We have quite a big funding that from the brokerage firm as well. We're not particularly old firm. We've been around for maybe 15 years now. So a relative newcomer I guess in the world of accountancy. But yeah, we're trying to try to make waves in the accountancy profession on the accounts. Exactly right. Based in Manchester. In London, Yeah.

00:01:44:16 - 00:02:16:23
Unknown
We actually have five offices. So our head office, if you like, is Manchester. We got an office in London, Liverpool, Leeds, and most recently Birmingham actually, as of this summer. Right. Okay, so let's start with the basics. What is capital gains tax and why is it relevant to the M&A market? So I suppose in its simplest form, capital gains tax is a tax that's based on the sale of an asset.

00:02:17:00 - 00:02:54:03
Unknown
And broadly speaking, it's based on the difference between what you sell an asset for versus what you originally bought. The asset for. And in the context of M&A, generally, we're talking about shares in businesses. So most clients that we work with have set up the business from scratch themselves. So often they're paid maybe £1 for the share capital or £100 quite commonly for the share capital that they're operating the business for a while and hopefully that selling the business for several million pounds or even more.

00:02:54:05 - 00:03:19:17
Unknown
And so in that scenario, the profit that's the right word to use that a shareholder or an entrepreneur makes on the sale of those shares, they would pay capital gains tax on that. So that is CGT in a nutshell. Okay. So that would be a difference between the £1 that they paid to buy the company and the million pounds, for example, if they said that price was correct.

00:03:19:19 - 00:03:48:15
Unknown
Correct. Under the current regime, how would they how would that going be taxed? So as we stand today, 14th of October, there are, I suppose, two rates really that a business owner could potentially pay and that depends on whether or not they qualify for something called business asset disposal relief, which I think will come onto a little bit later.

00:03:48:17 - 00:04:13:04
Unknown
But the two rates broadly are either 10% or 20% and the rate that they pay ignoring business asset disposal relief is linked to how much they earn from other sources. So for most clients in this position, I would imagine they're going to be higher rate taxpayers. So people who earn more than 50 K per annum, they're probably going to be looking at a 20% capital gains tax rate.

00:04:13:06 - 00:04:48:15
Unknown
Okay. And there's been a lot of speculation that the the rate of capital gains tax will will be altered in the forthcoming statements. If they are altered, is that going to be with immediate effect or will be some kind of phasing or introduction period? That's a good question. If it's an issue that I'm not sure I'd be sitting here right now, I think I think that for me, I think it's probably worthwhile just going going back and giving a bit of a wider context as to why capital gains tax is such a hot topic for this time round.

00:04:48:17 - 00:05:18:01
Unknown
Yeah, so way back in I think it was the autumn of 2020, the Office of National Statistics published a paper looking at capital gains tax and basically there were two main conclusions, really two to that paper, two to recommendations and one was the the disparity between the top rate of capital gains tax. And as I said, we're talking about, well, for shares, it's 20%.

00:05:18:01 - 00:05:38:15
Unknown
So we'll stick for the purposes of your audience. It's probably going to be 20% in the rate that most people are interested in. If it's a property, residential property that is rate at 28, but still relatively low rate. So so the disparity between the maximum rate of capital gains tax compared to the maximum rate of income tax, which at the moment is 45%.

00:05:38:17 - 00:06:06:01
Unknown
So as I say, the report recommended that that disparity between those two top rates was brought closer together, in effect to prevent people trying to artificially turn income into capital and pay the lower rates. The other the the recommendation was to reduce the tax free allowance for capital gains tax. So there was and still is an entirely separate annual tax free allowance for capital gains tax, which is called the annual exemption.

00:06:06:02 - 00:06:36:03
Unknown
Now, at the time, back in 2020, that was 12,000. It's now 3000. So we have seen that over recent years. So basically every budget event or every Autumn Statement event since 2020, the profession have kind of been expecting capital gains tax to rear its head. Now, fast forward to today. In their manifesto, the Labor Party made a massive deal of saying that they wouldn't raise the big Four taxes.

00:06:36:05 - 00:06:57:23
Unknown
So income tax, national insurance, VAT and corporation tax, we're not expecting a huge deal to change on those fronts. So that only really leads to taxes that they could look out to to raise more money. And all of the all of the discussion in the public eye over the course of the summer has been around, obviously trying to raise taxes.

00:06:58:00 - 00:07:14:23
Unknown
So that's why we're kind of now everybody's expecting capital gains tax to be the main one that they're looking at in the manifesto, silent on capital gains tax. And every time they've been asked, both the Prime minister and the chancellor of of kind of tried to avoid the question as to what's going to happen with capital gains tax.

00:07:15:00 - 00:07:42:14
Unknown
Yeah. So there's actually has been a big flurry certainly in this office over the last month or two of entrepreneurs wanting to sell their businesses before before they saw some save. And that explains why. Exactly. Exactly. So everyone's trying to get deals over the line before the 30th of October, just in case an announcement is made with immediate effect, which which is entirely possible.

00:07:42:16 - 00:08:25:08
Unknown
The other thing I should say on that is it's only fairly recently that we've moved to the main sort of budget statement taking place in the autumn. It always used to be in the spring. The rationale for changing it to the autumn was to allow a period of 12 months of consultation following the announcements. So if you think about it, an autumn budget proposals would be announced that there'd be a 12 month period of consultation for the profession and other interested parties to say, Well, hey, you've not thought about X, Y, Z, you need to just tweak the wording slightly for the legislation to then be passed and come into effect the following April thereafter.

00:08:25:08 - 00:08:55:03
Unknown
So you're talking about what, an 18 month reading period before before announcements actually come into play. But of course, this time with it being the first Labor Party budget, we're expecting the Labor Party to want to make a statement. And of course, politically, it's easier to to have a significant announcement, I suppose, or news in year one and then try and have better news in years two onwards.

00:08:55:05 - 00:09:24:22
Unknown
So as a minimum, I think everybody's expecting any any capital gains tax changes to come into play from April next year, April 25. But it could be with immediate effect 31st of October. Okay. And hence the sort of rush to try and get some of these deals out there. But it's interesting actually here, when you talk about, one, the rationale for wanting to increase it, being effectively disguised in income is as capital gains.

00:09:24:24 - 00:09:49:09
Unknown
A number of deals I've done in the past I know could be done to involve businesses with quite a lot of retained profit in them. And quite often there are discussions which take place when you're looking at how you structure a deal for that, for that retained profit to remain in the business and and be bought effectively. Is that the kind of loophole that they try and set to trying to close, in effect.

00:09:49:11 - 00:10:24:15
Unknown
Yes. Yeah, potentially. Yeah. Yeah. It could be more more obvious than that. I mean, I think, you know, there's a degree of commerciality to that as an example. I mean, if someone's made profits over, over the course of their business life and they've got accumulated profits that are sitting on the balance sheet at the point to sell a business, and those accumulated profits might be 5 million quid and then some cash in the bank and you then sell the business, the buyer would actually be taking over those accumulated profits and they can use those accumulated profits to pay dividends themselves.

00:10:24:15 - 00:10:54:09
Unknown
So for me, there is a commercial argument for that to be a capital transaction. Yeah, Yeah, absolutely. Obviously, it's it's quite a significant factor sometimes when when you look at buying businesses that have got, you know, significant cash reserves in them. So if so if we're looking at the rates of tax are applicable at the moment. I think you mentioned a little bit earlier because asset disposal relief, which I think previously would have been home, this entrepreneurs relief scheme is in practice.

00:10:54:09 - 00:11:30:19
Unknown
Everybody still refers to it, but is exactly the same as me. So yes, I'm glad I'm still not I'm not quite a dinosaur as asset as it sounds. So if we if we look at that, how does that impacts on the rate of tax that this is owners pay at the moment? Okay. Okay. So at the moment it allows a business owner to sell the business or to sell a business asset and benefit from a 10% tax rate on a maximum capital gain of £1,000,000.

00:11:30:21 - 00:11:58:08
Unknown
So if any fact the first million pound of proceeds on a in a business sale, usually you'd be looking at a 10% tax rate. The access over and above a million would then be at 20%. I think there are some conditions that are required to be met, to be able to claim business asset disposal or entrepreneur's relief, whatever you want to call it.

00:11:58:10 - 00:12:29:00
Unknown
But broadly speaking, most trading businesses where the the shareholder, they usually were talking about undermining businesses. Yep. So the owner manager owns more than 5%. You'd be looking at a eligibility for for for entrepreneur's relief. Okay. And I guess one obvious measure might be just to just to do away with entrepreneurs related to that. Not there a simple step for that for the government to take to this.

00:12:29:02 - 00:13:00:15
Unknown
Yes, to your question. But I should also say, actually, by the way, I didn't mention that earlier, I. So, you know, I said in the manifesto, the Labor Party said they're not going to talk, they're not going to look at the big Four taxes. So just to give you some context. Capital gains tax as it currently stands, represents on an annual basis about 14 billion of revenue for HMRC, which in percentage terms is about 2% that we can HMRC collects.

00:13:00:17 - 00:13:31:11
Unknown
Okay. I think that's important to point out to people because it gives you a flavor as to what what the government are working with. Yeah, so yes, they could immediately scrap entrepreneurs like full stop, and I think that's a really interesting discussion to get into, to be honest. So entrepreneurship or business, I think supposedly it is called today, as we said previously, entrepreneurs.

00:13:31:13 - 00:13:58:03
Unknown
Before that I think it was called taper. It was a kind of taper relief before that retirement relief. So in some way, shape or form, there has been some tax relief, I suppose. But for entrepreneurs exiting businesses for quite some time. So for the government to completely scrap it full stop, I think would be quite a controversial move.

00:13:58:05 - 00:14:40:24
Unknown
But I notice the I think is the Institute of Fiscal Studies have published a document earlier this month, only a couple of weeks ago, specifically looking at capital gains tax and interesting re the recommendation that they've suggested is yes, get rid of entrepreneurs, legal business, asset disposal relief, but replace it with something that's more fit for purpose. They believe that as it's currently written, business asset disposal relief kind of rewards people on the back end, of which of course it does.

00:14:41:01 - 00:15:09:09
Unknown
People in the business. Whereas arguably the reason why we have a relief is to incentivize people in the first place to be entrepreneurial. So some of it in in the report, the IFRS said actually a better relief would be more akin to this, whereby you give tax relief on the way in. So on the initial investment. Exactly how that would work in practice, who knows?

00:15:09:11 - 00:15:32:07
Unknown
But effectively, what they're saying is flip it on its head instead of giving people tax relief at the end when when the cash out. Yeah. At which point ideally we've got a load of money in quite wealthy individuals give the tax relief on the way in in the first place and therefore you would still incentivize people to be entrepreneurial.

00:15:32:09 - 00:15:51:07
Unknown
So yeah, I think it's a really interesting, really interesting topic to get into. I think it would be a complete fundamental changes to how the whole system works. Something as fundamental as that. Could I see them saying with immediate effect that's happening? I don't know. To be honest, I think Corfield would be that would be more realistic to be.

00:15:51:07 - 00:16:09:08
Unknown
Okay, well, we're going to change it, but this is what we're thinking of going with. And it's going to come in, say, in April next year, in which case, if they do that, I could foresee a kind of stamp duty rush with a lot more entrepreneurs that keen to try out their business before before those changes come in.

00:16:09:10 - 00:16:33:04
Unknown
So I'm going to put you on the spot now. So if you had a crystal ball, well, what I think is most likely for them to be doing, I think it's going to be I think it's pretty likely that they're going to increase the rate. We've seen lots of talk in the press in the tax profession, you know, in the industry, professional papers and whatnot.

00:16:33:06 - 00:16:59:01
Unknown
And I've seen sort of rates quoted between 33, 39%. Yeah, that's what I've actually that I'd seen the 39% figure. So yeah. Interestingly, by the way, we did used to have a system whereby capital gains tax was aligned with the income tax rates and it was late eighties and early nineties when that system was in place. So it's not something we have had before as a nation.

00:16:59:03 - 00:17:27:24
Unknown
I think I think it's highly likely we're going to see an increase in the rates to somewhere in that kind of ballpark. A lot harder to say whether or not they will completely scrap. Unsurprisingly, if the Institute of Fiscal Studies are recommending it, then it's hard to look beyond that. I think if they increase the rate, we could also see them bringing back indexation sets.

00:17:28:01 - 00:18:11:15
Unknown
So indexation is a was an allowance that people could claim to effectively try and counter the impact of inflation in a capital gain. If you think about housing market for example. Yeah, of course, you know you can't buy a house today for the same price that your parents bought a house for 20, 30, 40, 50 years ago. And so, you know, if the rate is increased, will we see indexation coming back into place so that we're only taxing the true capital gain, ignoring any inflationary impact?

00:18:11:17 - 00:18:42:08
Unknown
Difficult to say whether that will be or whether we will see that come back. Interesting. So if we if if we have the if we have the statement and there was a bit of time between that being issued and and any rate change come into effect early measures you think business owners could take other than obviously trying to get the sale through before before April 20, 25 to try to try and mitigate this the tax position.

00:18:42:10 - 00:19:16:03
Unknown
It's difficult, isn't it? It's difficult. I mean, as the age old saying, isn't it? Don't let the tax tailbacks it's all coming from fundamentally, as a business owner, you wouldn't necessarily want to agree to a sale, just a bunker tax rate. Now, you know, the decision is much wider than the. On the flipside, of course, if you're already if you've already agreed a sale price on the expectation that the tax will be X and the sale is delayed and the tax becomes why won't you would you have agreed to that same sales price?

00:19:16:04 - 00:19:41:09
Unknown
Exactly not. So, so there's a whole host of things to think about. I think if there is time before changes come in, I think people who are approaching retirement age and are thinking about, okay, what should I sell, I might be selling in the next two or three years anyway for those kind of people. Arguably, there's a there would potentially then be a rationale to say, okay, well, let's try and get it doing it over the long before April.

00:19:41:11 - 00:20:15:05
Unknown
Yeah. How realistic that is in practice, I guess, depends on the nature of the business. But I don't think there'll be a huge other than trying to force transactions through and over the line. There's not a massive amount that people could do. I mean, there are, there are re-investment reliefs that could defer the gain, but kind of opens up a whole different sphere of questions and rationale to think about for particular taxpayers.

00:20:15:07 - 00:20:38:15
Unknown
Yeah, it'll be interesting. I think. See, after that statement, as I say, I would expect if there's some time for transitional provisions to come into effect, that will see a rash of deals. What then happens after that new tax rate cuts said, I think we'll see a low for a while, but people sit and wait. Just see whether that's interesting.

00:20:38:17 - 00:21:18:16
Unknown
That's an interesting point. I believe HMRC themselves have said that if capital gains tax was increased by one percentage point, you'd be looking at hundreds billion of extra revenue. Yeah. Bear in mind, all of the talk in the press is about a 22 billion black hole. Yeah. So it's also a hundred million doesn't really cut the mustard because and more interestingly, if the increase is by ten percentage points, we would actually see a reduction in tax revenue by 2 billion.

00:21:18:18 - 00:21:37:15
Unknown
When it comes back to that, I would say this, that people will pay tax if they think the rate is fair and the quite where that second point is is anybody's guess. I would say we've got to be careful only because, you know, if a if you're not careful, we could be incentivizing people to just retain assets indefinitely.

00:21:37:17 - 00:21:56:15
Unknown
Obviously, capital gains tax is only payable if you actually realize the disposal. So you just Yeah, and it goes up. Yes, it's gone up in value on paper. But until you've actually disposed of the asset, realize not going no taxes payable so we could end up with you know serial investors just building portfolios and holding onto stuff. Yeah.

00:21:56:15 - 00:22:16:10
Unknown
I think there is a real risk of that. Well, we'll look, David, that's been a really fascinating insight into capital gains tax and where we think we're going to be after the end of October. So, David, if any of our listeners want to get in contact you to discuss any of the issues that we've talked about in this podcast, how should they do that?

00:22:16:14 - 00:22:39:13
Unknown
Email is probably best in the first instance. So, David Dot Evans, should you load up credit UK ACTU. Brilliant. Thanks very much for your time today, David. Thanks, John. Thanks very much for listening to the deal to our podcast on John Andrews. If you want to contact me to discuss any of the issues raised in this podcast or indeed any previous podcasts, the best way is on my email.

00:22:39:18 - 00:22:50:09
Unknown
John Dot Andrews at J.M.W. dot Code, dot UK or my telephone number is 0768266036 Speech, you say.