Many speculated an increase in Capital Gains Tax “CGT” rates would be announced in Labour’s first budget and they were correct, although rates did not increase as much as anticipated.
Capital gains tax rate changes
The lower rate of CGT increased from 10% to 18%, whereas the higher rate increased from 20% to 24% which aligns with the rate for disposals of residential property. The changes took effect immediately following the budget which means individuals may be subject to different tax rates for the 2024/25 tax year depending on the timing of disposals.
Business Asset Disposal Relief
Business Asset Disposal Relief “BADR” was originally introduced to incentivise and reward entrepreneurship but has been under scrutiny over the years, with fear that it would be abolished completely. The relief enables business owners disposing their business to benefit from lower tax rates provided they meet the required conditions, subject to a £1 million lifetime limit.
Business owners will be relieved that only small and gradual changes to the rates were announced in the budget:
- 2024/25 – CGT on eligible gains will remain at 10% for the remaining tax year
- 2025/26 – CGT on eligible gains will increase to 14%
- 2026/27 – CGT on eligible gains will increase to 18%
There is a window of opportunity available until 5 April 2025 to benefit from the low 10% tax rate if business owners are considering a sale of their trading business. This could save each shareholder £40k in tax.
Succession planning
Shareholders looking to exit or pass control to employees or family members should consider the options available at an early stage as this would enable an appropriate structure to be put into place, ensuring a smooth transition and to achieve tax efficiency.
There are various ways in which succession planning can be undertaken which will depend on various factors and ultimately what the shareholders seek to achieve.
We can advise on a number of strategies such as management buy outs, company purchase of own shares and the use of holding companies to name a few.
Employee Ownership Trusts “EOTs”, whereby a company is sold to its employees (similar to the John Lewis model) are gaining in popularity. It has been proven EOTs result in higher productivity and growth and facilitates a quicker sale compared with a traditional third party sale. Shareholders selling their business are able to sell their shares completely free of capital gains tax. The rules surrounding EOTs are complex and have been further tightened following a recent HMRC consultation. Sales to an EOT structure will not suit every business, however, it can provide vast benefits for all parties involved if it is eligible.
If you would like to speak with one of our specialist tax advisers and discuss any aspects further, please contact our Tax Team at Ellacotts on 01295 250401 or email solutions@ellacotts.co.uk.
Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
