Care home owners who are in the process of selling their businesses should aim to complete their transactions as quickly as possible or potentially face higher tax bills on the proceeds, according to Chris Rowlands, managing director of Amberglobe Care.
Looking ahead to the Budget on 3 March, Rowlands warns that Capital Gains Tax (CGT) rates and allowances could be in the sights of Chancellor Rishi Sunak as he seeks to recoup the costs of the Government’s pandemic response.
CGT is paid on the gain when an individual sells an asset, meaning that if somebody purchased an asset for £200,000 and subsequently sold it for £300,000 then £100,000 would be subject to CGT. If, however, they were selling a business they had built from scratch then the whole amount for which it was sold would be likely to be taxable.
Mr Rowlands, who is one of the UK’s most experienced business transfer specialists, said, “There will be political pressure on the Chancellor not to increase taxes in a way that obviously reduces consumers’ or companies’ disposal income, so I don’t expect any changes to Income Tax, National Insurance, VAT or Corporation Tax this year. Post-Covid Britain will need to spend its way out of recession so the Budget is unlikely to target ‘earned’ income.
“However, CGT is often seen as a tax on transactions, paid by venture capitalists, hedge fund managers and property speculators. In the real world, of course, it is also paid by hundreds of thousands of entrepreneurs, including care home owners, every year when they sell their businesses, either to pursue other opportunities or to retire.
“This should make the Chancellor think twice about raising the rate of CGT, or reducing the annual tax-free allowance for capital gains, but I suspect it might not. A year ago, we should remember, Mr Sunak slashed the lifetime limit for Entrepreneurs Relief from CGT, showing he is not afraid to target business owners.”
In his first Budget, delivered on 11 March 2020, Sunak reduced the lifetime allowance for gains eligible for Entrepreneurs Relief, on which CGT is paid at a reduced rate of 10 per cent, from £10 million to £1 million. He also renamed it “Business Asset Disposal Relief.”
“Renaming Entrepreneurs Relief last year looked like a clear warning shot,” Rowlands continues. “Calling it ‘Business Asset Disposal Relief’ links it more closely with professional investors than care home founders in the public imagination, making it politically easier either to alter the rate at which tax is relieved or to abolish the relief altogether in future.”
Entrepreneurs Relief is not the only aspect of CGT that the Chancellor could have in his sights on 3 March. CGT on most business sales is currently charged at 10 per cent for basic rate income taxpayers and 20 per cent for higher and additional rate taxpayers*, which compares to a basic rate of income tax of 20 per cent, a higher rate of 40 per cent and an additional rate of 45 per cent.
The Chancellor could choose to close the gap between tax on income and capital gains. He might also reduce or abolish the annual allowance that currently allows individuals to realise gains of up to £12,300 per year before CGT becomes payable.
Rowlands said: “CGT looks like a sitting duck for the Chancellor and, if he does reform it, some or all of the changes might have immediate effect. Last year’s cut to Entrepreneurs’ Relief was imposed from midnight on Budget Day, rather than from the beginning of the new tax year on 6 April, so time is of the essence for care home vendors who want to be certain of keeping as much as possible of the proceeds from the sale of their life’s work.”