It went mostly unremarked when HMRC changed its charter in early 2016 to give itself more flexibility and latitude. Its obligations went down by two while taxpayer obligations went up by five. And there was a change to one of its strategic objectives, moving from “helping you pay the right amount of tax” to “maximising revenues”.
Since then dentists have been hit on dividends, employment status of associates and now, as the UK faces an annual bill of at least £300bn for Government responses to Covid-19, the vice tightens.
Unsurprisingly then, the report commissioned by the Chancellor into Capital Gains Tax (CGT) has come in with some sweeping recommendations. What fresh hell is this, then? The report which was, ominously, produced faster than usual, goes further than expected, with the suggestion that CGT could be doubled if it was aligned with income tax, as it was about 30 years ago.
There is the idea of ending the death ‘uplift’, which happens when someone inheriting an asset acquires it at its market value on the date of death, rather than the amount it was bought for, so the beneficiary can ‘dodge’ CGT — conveniently forgetting it is already getting taxed under Inheritance Tax (why increase rates conspicuously when you can simply double tax the same item?). And there is the suggestion that the £12,300 annual tax free CGT allowance is cut to £2,000.
A second report to follow early next year will deal with implementation, which suggests the changes won’t come in the next Budget around March 2021 but the one after. The Government is also talking about further changes to Entrepreneurs’ Relief (or, Business Asset Disposal Relief as it’s now called), even though it already cut the eligibility threshold from £10m to £1m in March. It wants the tax to reward only those who are retiring after a lifetime of work, so it’s looking at ways to link it to pension age.
If much of the above was expected, an ominous feature of the report wasn’t. It is the radical idea that the boundary between capital and income might be eliminated. There’s talk of taxing profits you don’t extract from your company to ‘level the playing field’, as they do in the Republic of Ireland. This changes the rules somewhat, because having control over what you designate income versus revenue is the principle tool you have for protecting yourself against tax exposure as successive governments tweak rates and thresholds.
Is the cat about to pin down the mouse? Well, it does feel like significant structural changes in the system are coming. Not next Spring, perhaps, but soon. You can expect tax rates to rise in Spring though. Where does that leave you? Many practice owners had been relying on Entrepreneurs’ Relief to meet their exit plan objectives.
We’re involved in over £20m of sales right now and most wouldn’t be happening if the CGT rate had already doubled or Entrepreneurs’ Relief wasn’t there for them. So the practice sales market is going to be hurting, and if you’re looking to get out soon, all of this is going to give you a headache. We have options for mitigating the situation for those who want to do something before the next Budget. By the end of next year, though, all of the above will probably have happened. It’s almost inevitable in some format.
Of course, there will be opportunities to build your wealth too, there always are. Even if they are nothing like what you expected. Get in touch if you’d like to steer your ship strategically through the tax sea changes we are about to see.
