In light of the potential increase in Capital Gains Tax (CGT) and other changes in the upcoming budget, we are reaching out to clients who have sold businesses and/or received loan notes, securities, or rollover shares since 6 April 2022.

Whilst any cash, deferred cash or earnout elements of proceeds will be taxable at the date of completion (and therefore not affected by any changes in the upcoming budget), this is not the case in respect of loan notes, securities, or rollover shares. 

If the CGT rates increase in the budget, which is highly likely, there may be ‘anti-forestalling rules’ introduced that prevent you from claiming reliefs after the budget date where you have not already formally done so – even where your transaction completed pre-budget.

The below table sets out the circumstances in which you may be affected  - Nick Wright, tax director of Jerroms Miller Specialist Tax can also be seen discussing this table here

If you fall into either of the highlighted categories above, please continue reading for further information about what this could mean for you.

DEFAULT TAX POSITION

If you have sold any business asset that qualifies for Business Asset Disposal Relief (formerly Entrepreneurs Relief), then you are entitled to up to £1 million gains taxable at 10% (subject to lifetime limits previously used). If you have not submitted your tax return yet to claim BADR, then we would recommend that a BADR election is formally submitted to HMRC prior to the budget as a precautionary measure.

If your proceeds consisted of more than just cash, the default position is that the gain on loan notes or rollover share elements is ‘rolled over’ into the new assets, meaning no tax is payable – however, you do have the option to disapply the automatic relief and tax the gains at completion along with any cash proceeds, in some cases.

The option to pay the CGT earlier is only available if you are eligible to make an election for BADR. If this is the case, and an election to tax all the proceeds upfront has not been made prior to the budget, you may be subject to the CGT under the new regime on these new assets in the future, regardless of your gain being made prior to the date of the budget.

You will likely have had discussions surrounding the tax impact at the time of completion and may have decided that you don’t want to pay CGT in respect of any loan notes, securities or rollover shares, and will instead declare them on any future redemption or sale. If this is still your view, then you do not need to take any action – HOWEVER, if the government were to introduce increased CGT rates as expected, and put ‘anti-forestalling rules’ in place, it is important to stress that the failure to make an election means you cannot change your mind, and those future gains will be taxed in accordance with the capital gains rates in force at that future time.

An election can (and should) be made independently of the tax return and prior to the budget, but it is irrevocable so if rates do not increase then you will be paying tax earlier than you would have if you had rolled over the gains.

BREAKDOWN OF CGT

Cash or deferred cash

• Taxable in the year of completion – however, if you are eligible for BADR, we recommend a BADR claim is made, in writing, prior to the date of the budget, even if your tax return is not due yet – this is just a precautionary measure in case BADR is abolished in the budget with retrospective effect.

Loan notes, securities, and rollover shares

• Generally, the gain in relation to these types of considerations will automatically roll over unless you elect to tax them upfront. This is typically done via your tax return, but due to the potential anti-forestalling rules, it is crucial to consider making the election before the budget.

• Electing to pay tax upfront applies to the entire gain on all forms of consideration, therefore, if your gain exceeds the £1m lifetime allowance, you will be subject to CGT at 20% on the remaining amount.

• It is only possible to elect to pay tax upfront on these forms of consideration where you have not fully utilised your £1m lifetime allowance on previous disposals AND you qualify for BADR on the disposal e.g. it must be a trading company in which you held at least 5% of the share capital and were a director and/or employee for the two years up to the date of disposal.

• CGT will be payable depending on the date the original disposal was made:
• Tax year 2022/23 – by January 2024 (some late interest will be due)
• Tax year 2023/24 – by January 2025
• Tax year 2024/25 – by January 2026

DO YOU NEED TO TAKE ACTION?

If an increase in CGT would influence your decision to pay tax upfront on cash not yet received, it may be too late to make the election when submitting the return if this is after the date of the budget. Therefore, if you prefer to accelerate the CGT to secure the current 10%/20% CGT rates, we highly recommend you complete and submit an election before the budget.

If you need to take any action or have any queries, please contact Kate Moon (This email address is being protected from spambots. You need JavaScript enabled to view it.), who will be happy to discuss your circumstances.