Tax planning strategy #1: Saving Capital Gains Tax
The Autumn Budget announced a significant increase to the lower rate of Capital Gains Tax (CGT) on non-resident assets from 10% to 18% and a higher rate increase from 20% to 24% for disposals made on or after 30 October 2024.
Business Asset Disposal Relief (BADR), which reduces the effective CGT rate, will also be increasing as follows:
- Remains at 10% in the 2024/25 tax year.
- Increases to 14% for disposals made on or after 6 April 2025.
- Increases from 14% to 18% for disposals made on or after 6 April 2026.
The Chancellor confirmed that BADR’s lifetime limit of £1m would remain unchanged.
These changes may affect business owners and their decision on when they sell their business.
CGT example scenarios 2025 and beyond
Let’s look at two scenarios…
- An individual disposes of their shares in a trading company (that qualifies for BADR) and recognises a gain of £1m; and
- An individual sells a painting for a gain of £1m
What happens if the assets were disposed of on 29/10/24, Budget day, 6th April 2025 and 6th April 2026?
Sale 29 Oct 2024 | Budget Day | Sale 6 April 2025 | Sale 6 April 2026 | |
10% / 20% | 10% / 24% | 14% / 24% | 18% / 24% | |
Business Asset Disposal Relief (BADR) | £100,000 | £100,000 | £140,000 | £180,000 |
Other – Non Res (£1m) | £200,000 | £240,000 | £240,000 | £240,000 |
Total Tax Due | £300,000 | £340,000 | £380,000 | £420,000 |
Our tips to minimise your CGT liability
Owner-managers double up BADR by allowing spouses to hold sufficient shares to qualify for BADR.
Each spouse has their own BADR lifetime limit. A spouse may be eligible to qualify for BADR by (broadly speaking) holding a 5% shareholding and being an employee or officer of the company for the required 2-year period prior to a disposal.
Accelerate exit plans before 6 April 2025
The BADR rate increases from 10% to 14% from 6 April 2025, so a shareholder who would qualify for BADR may wish to crystallise their share disposal prior to that date.
Company sale
A straightforward means of crystallising the disposal of shares is a third-party sale. This offers the sellers the potential for a clean exit with the majority on all of the cash proceeds paid upfront. However, the timing is not under the control of the sellers and can involve complex due diligence processes, sale negotiations and risk of the sale falling through at any point before completion.
Management Buyout (MBO)
One option for a “friendly sale” is an MBO, in which the management team acquire the exiting shareholders’ shares via a buyout vehicle. This can be very attractive to a motivated management team. An MBO offers benefits to the seller as well, usually including a quicker sale process with lighter touch due diligence and less risk of the transaction falling through. However, the MBO team must be able to finance the purchase through third party finance or pay out the exiting shareholders over a longer period from business profits (seller finance). Where there is deferred consideration, the sellers will want to ensure they can finance the tax liabilities falling due.
Sale to an Employee Ownership Trust (EOT)
Another option for a friendly sale is to sell shares to an EOT. A qualifying EOT sale is eligible for an extremely attractive 0% rate of capital gains tax. An EOT is a trust which is set up for the benefit of the employees of the company/group. For the sale to qualify for the 0% tax rate, the EOT must buy a controlling stake in the company/group, along with various other conditions to be met.
As for an MBO, an EOT sale is more straightforward and can be completed more quickly than a third-party sale, as the majority of the EOT trustees will be familiar with the company (and will often include the sellers). An EOT sale may not be the best option where a strong management team wishes to succeed the exiting shareholders, but if there is no ready and willing MBO team, an EOT sale has the advantage of motivating the whole workforce who can benefit from a stake in the company and from potential tax-free bonuses of a set amount.
Purchase of own shares
A company can buy back its own shares from a shareholder to allow a shareholder to exit the company without the need for a third-party sale. However, there are strict conditions to be met for a purchase of own shares to qualify for capital treatment (rather than the proceeds being taxed as a dividend), along with the usual conditions required to be met for a seller to qualify for the BADR rate of Capital Gains Tax. The company usually needs to have sufficient cash available to acquire the shares in one transaction; care must be taken if the company cannot purchase all the seller’s shares upfront.
Gifts
It is also possible to gift shares in a trading company or holding company of a trading group whereby the shares are the donor’s personal company (the donor can exercise at least 5% of the voting rights in that company) and claim full or partial holdover relief (section 165 TCGA 1992) to prevent all or some of the capital gain triggering a charge to Capital Gains Tax. The gift will usually be to family members, but it does not have to be, it could be to a key employee. Holdover relief is not automatic and if the relevant conditions are met, the donor can choose to make a joint claim to prevent some or all of the capital gain from triggering. For the donor, an election, results in the chargeable gain being reduced by the held over gain; for the donee, the base cost is reduced by the quantum of the gain held over. Any gifts of shares to family members are, in most cases, “deemed” to take place at market value but that does not prevent full or partial gift relief from being claimed should the relevant conditions be met. The relief aims to prevent tax from being a hurdle to the succession of acceptable assets by ensuring that a dry tax charge does not arise on a gift.
With good tax planning advice, you could still have time to minimise your CGT bill. Contact us today to speak to a tax expert on how to save CGT.
Check back on our insights in the coming weeks, when we’ll be sharing more key 2025 tax planning strategies…
West London
3 Brook Business Centre,
Cowley Mill Road,
Uxbridge, UB8 2FX
East London
London, E11 1GA
South London
London Bridge
73–81 Southwark Bridge Road,
London, SE1 0NQ
City London
London, EC2M 1JH
We believe we are more than just your average accountancy firm. Our goal at Barnes Roffe is to engage our clients through a proactive relationship, which provides you with the resources and tools you need to enable you to take charge of your finances with confidence.
Tax news, audit news and any new accounting news ... with the help of our topical tips, blogs and key guides you can enjoy the benefit of being regularly informed of business and accounting updates which are likely to be relevant to you and your business.
PLEASE NOTE: By the very nature of this type of information the details of tax law might have changed since they were published, so contact your Barnes Roffe partner before acting on any matter contained in these documents.