Changes announced below are accurate as of 13/11/2024.
Tax Rates & Thresholds
Given all the speculation regarding the potential alignment of capital gains tax with income taxes, the actual increases to CGT were well relatively limited, and well received.
A clever exercise in expectation management by the Government.
The rates of CGT have been increased, effective immediately at the date of announcement, that is, from 30 October onward.
The lower rate of CGT is increased from 10% to 18%, and the higher rate increased from 20% to 24%. These tax increases are lower than feared, with the top rate remaining lower than historic rates of 28%.
Capital gains rates for qualifying disposals of residential property will remain the same at 18% and 24% respectively.
Business Asset Disposal Relief and Investor’s Relief
Business Asset disposal Relief (BADR) – previously known as Entrepreneurs Relief – is a capital gains tax relief for qualifying business disposals including shares in a personal company, sole traders, partners, or trustees of a settlement with a qualifying beneficiary.
Where relief is available, CGT applies at a reduced rate of only 10%. However, this is subject to a lifetime allowance of £1m per individual. Beyond this, gains are taxed at ordinary rates.
BADR as a tax relief is essential to the UK economy. It recognises the significant efforts and risks incurred by UK business owners, and incentivises these activities.
By promoting the sale of businesses to new owners (as a capital event), it injects dynamism into the economy – without which, owners may choose to retain the business beyond their useful stewardship, simply to continue accessing dividends.
An extension of the BADR rules is Investor’s Relief (IR) which applies to disposals of qualifying shares in an unlisted company. It also attracts a reduced rate of CGT at 10% at a higher lifetime limit of £10m.
In a move that will be celebrated by entrepreneurs, BADR will remain with its current lifetime limit of £1m, while investors will continue to benefit from IR albeit at a reduced allowance from 6 April 2025, in line with BADR at £1m.
BADR & IR Rates
The relevant tax rates applying to qualifying disposals for both BADR and IR will remain at 10% until 6 April 2025, i.e. until the end of the current tax year.
Speaking relatively, this could be considered to represent a increase in value of this tax relief. For a brief period between now and the end of the current tax year, the effective benefit of Business Asset Disposal Relief is increased, from £100k to £140k (i.e. £1m at 10% in comparison to main CGT rates of 24%).
However, from this April 2025 onward BADR rates will increase to 14%, with a further increase from 6 April 2026 to 18%.
As a simple example…
If a two owner-managers sell their equally owned trading business for £1.5 million:
- Before 6 April 2025
…The tax cost will be £150k (£1.5 million at 10%), leaving net proceeds of £1.35 million
- After 6 April 2025
… The tax cost will be £210k (£1.5 million at 14%), leaving net proceeds of £1.29 million
In this example accelerating timeframes could have saved £60,000 in taxes.
The preservation of BADR at existing rates – at least to the end of the tax year – provides a small window of opportunity for business owners to undertake exit / succession planning at more favourable tax rates.
Exit planning is a key area of expertise for both the Xeinadin tax and Corporate Finance teams. Do get in touch with your local advisor if you would like to explore options.
Anti-Forestalling Rules
Alongside increased tax rates, protective rules known as “anti-forestalling” measures are to be introduced to ensure capital gains tax is payable at what the Government consider to be the correct rates.
There are two main areas that are to be targeted.
Unconditional contracts
If the disposal of a capital asset occurred under an unconditional contract, which was entered into before the Budget – with completion occurring afterwards – the transaction may be charged to tax at the recently increased CGT rates (i.e. up to 24%).
Late Elections
The second area where anti-forestalling may apply relates to certain company sales.
Where shares in a private company are sold, consideration may be provided by the acquirer as cash on completion, loan notes, shares in the purchasing company, or a mix of all of the above.
Where shares or loan notes are received, an election to be taxed upfront can be made, usually up to a year after the tax return is filed. However, under anti-forestalling rules – where the seller continues to retain an interest in the acquiring company – the relevant the applicable CGT rate will be those that apply when the election was made, not when the transaction occurred. The idea here is to ensure that increased CGT rates can’t be cleverly avoided by making subsequent elections.
At present, if any gain is covered by Business Asset Disposal Relief this anti-forestalling rules will have no impact. The same 10% tax cost will apply. However, for non-qualifying disposals and/or transactions taking place at a later date, these rules will need to be carefully navigated.
This represents a simplified summary of a highly technical area. Speak with your local Xeinadin advisor if you think you may be affected.
Taxation of Employee Ownership Trusts
Employee Ownership Trusts (“EOTs”) represent a structure for business ownership, under which the business is held for the benefit of the staff.
This can provide several tax advantages, including a complete exemption from capital gains tax rate on sale to an EOT, and the ability to pay tax-free bonuses to qualifying staff. As a result, they provide an excellent exit planning vehicle for business owners, particularly where an external purchaser is not readily available.
The attractiveness of an EOT structure, from both a commercial and tax perspective, are only expected to grow as capital gains tax rates increase.
For transactions on or after 30 October 2024, the qualifying conditions for favourable tax treatment are now made more stringent. Some important changes include:
- Sellers must not continue to control the company following the sale – that is, it must represent a genuine “passing of the torch” to the employees
- The trustees must take reasonable steps to ensure the consideration paid to acquire the company shares does not exceed market value, and
- Qualifying conditions must be met for a full 4 years following the sale, for the tax benefits to be retained.
In all, these changes are fairly sensible in nature, and should not deter genuine commercial transactions.
EOTs continue to represent a highly advantageous structure for exit planning, and represent an area in which Xeinadin are well place to assist suitable clients.
Carried interest
Finally, although relevant to few people, the rules on Carried interest have been reformed.
Carried interest is a performance-related reward received by a small population of fund management executives and, where certain conditions are met, can be subject to Capital Gains Tax at rates of 18% or 28%, rather than Income Tax which could be taxed at rates as high as 45%.
An increased capital gains tax rate will apply on Carried Interest at 32% from April 2025.
Subject to Consultation, income taxes and NICs are expected to apply from April 2026 onward.
Income taxes and NICs are however expected to apply from April 2026 onward.
If you would like to find out more about this area, and how we may be of support, please get in touch with your local Xeinadin advisor.
Written by Adam Owens CTA, Tax Advisory Partner at Xeinadin
