# Following Uncle Sam and what it means for UK entrepreneurs
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2021-07-07
Category: BUSINESS
Category URL: https://financedigest.com/category/business
Meta Title: UK Capital Gains Tax Reform: Implications for Wealthy Individuals
Meta Description: Find out how proposed changes to CGT could affect UK taxpayers and the economy in the wake of global tax reform discussions and increased public pressure on
URL: https://financedigest.com/following-uncle-sam-and-what-it-means-for-uk-entrepreneurshtml

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_By **Eddie Bines,** Managing Director Restructuring Advisory, Kroll and Greg Pollock, Managing Director Restructuring Advisory, Kroll_

Rarely does a day go past without tax reform rearing its head in a daily financial news bulletin. In particular, [continued talk of a capital gains tax](https://www.financedigest.com/how-firms-can-continue-to-hire-contractors-with-confidence-when-new-tax-rules-get-underway-in-april-2021.html "How firms can continue to hire contractors with confidence when new tax rules get underway in April 2021") (CGT) reform in the UK has been widespread and resounding for some time. In the wake of the unprecedented, but necessary, public spending throughout the pandemic, the Treasury will certainly need to find [ways to reduce the deficit and rebalance the UK’s finances](https://www.financedigest.com/6-ways-to-finance-your-dream-vacation.html "6 Ways to Finance Your Dream Vacation").

Some predicted that Chancellor Rishi [Sunak might put in place CGT reforms](https://www.financedigest.com/uks-sunak-shelves-childcare-reform-indefinitely-the-telegraph.html "UK’s Sunak shelves childcare reform indefinitely – The Telegraph") in the Spring budget in March. He didn’t, and neither was there any mention of it on so-called “Tax Day” (23 March).

Since then, President [Biden has set out plans](https://www.financedigest.com/uks-sunak-plans-to-meet-biden-in-g20-summit.html "UK’s Sunak plans to meet Biden in G20 summit") to nearly double capital gains tax for wealthy Americans, with tax rates set to soar from 20% to 39.6% for those earning more than USD 1 million (mn) a year from investment income. With the UK generally following the U.S. over [time on tax](https://www.financedigest.com/german-tax-revenues-fall-in-august-for-first-time-this-year.html "German tax revenues fall in August for first time this year") policy, the question now is “when?” and not “if?” the UK will follow in the footsteps of our American cousins. It could be only a few months away, in Autumn this year.

It is unlikely to be a controversial reform to the majority of the UK population, given that an increase in CGT is only estimated to impact a small percentage of the population. Of course, there may be a flight risk in imposing significant [tax increases on the wealthy, which could itself lead to reduced investment and lower tax revenues](https://www.financedigest.com/adding-revenue-through-rd-tax-relief-service-2.html "Adding Revenue through R&D Tax Relief Service"). But there is increasing worldwide public awareness and discourse over the unequal distribution of wealth and the ever-widening gap between the rich and less well-off. This increasingly puts pressure on government policy, and in turn, on wealthy individuals.

Careful navigation through these difficult decisions in the months and [years ahead is the order of the day](https://www.financedigest.com/tall-marks-its-25th-year-with-celebration-day.html "TALL Marks its 25th Year with Celebration Day ") for the chancellor, and the UK’s owner-manager community will be watching closely.

**Potential changes to CGT**

The Office for Tax Simplification’s (OTS) review of the CGT system carried out in July 2020 is a good place to start when considering the [potential impact](https://www.financedigest.com/future-market-insightss-detailed-report-on-cat-litter-market-offers-projections-of-potential-impact-of-corona-virus-outbreak.html "Future Market Insights’s Detailed Report on Cat Litter Market Offers Projections of Potential Impact of Corona Virus Outbreak") of the reform. It found that the CGT [system could be made](https://www.financedigest.com/money-laundering-made-easy-by-uk-financial-system.html "Money laundering made easy by UK financial system") simpler and fairer by:

1. Aligning CGT rates more closely to income [tax](https://www.financedigest.com/uk-cabinet-was-not-informed-of-plans-to-scrap-top-rate-of-tax-truss-says.html "UK cabinet was not informed of plans to scrap top rate of tax, Truss says") rates
2. Reducing the CGT tax-free allowance
3. Removing the “CGT uplift” on inherited assets
4. Reassessing existing CGT reliefs

The realignment of CGT rates to [income tax](https://www.financedigest.com/the-sixteenth-amendment-and-income-tax.html "The Sixteenth Amendment And Income Tax") is an obvious place to start. The removal of the distinction between assets and [property and an overall increase](https://www.financedigest.com/4-tips-for-landlords-to-increase-rental-property-profits.html "4 Tips for Landlords to Increase Rental Property Profits") in rates is likely. There may be a gradual increase in rates to soften the initial blow or a threshold above which [higher](https://www.financedigest.com/wall-st-heads-higher-as-fed-rate-hopes-dent-dollar.html "Wall St heads higher as Fed rate hopes dent dollar") rates of CGT kick in.

There may also be a reduction of the existing CGT annual exemption of GBP 12,300, down to a lower sum, potentially between GBP 2,000 to GBP 4,000. This could be accompanied by further exemptions on personal items for individuals, but that will be of no benefit to [business owners](https://www.financedigest.com/small-business-owners-are-highly-optimistic-about-2017.html "Small Business Owners Are Highly Optimistic About 2017 "). Again, there may be a gradual downward tapering of the exemption to make the pill easier to swallow.

The so-called CGT uplift on inherited assets may also potentially be a victim of the chancellor. Currently, an [individual that inherits an asset](https://www.financedigest.com/uks-cineworld-to-not-sell-assets-individually-denies-talks-with-amc.html "UK’s Cineworld to not sell assets individually, denies talks with AMC"), for example, a shareholding in a family business, who then goes on to sell it for a profit is subject to CGT. This is based on the difference between the value of the asset when they inherited it and subsequently sold it, as opposed to the original price the deceased bought it for. This “CGT uplift” can significantly reduce the amount of CGT to be paid. However, the removal of the uplift could make holding on to such an asset less attractive and give [rise to alternative tax planning during the shareholder’s](https://www.financedigest.com/unicredit-shareholders-urged-to-reject-ceo-orcels-pay-rise.html "UniCredit shareholders urged to reject CEO Orcel’s pay rise") lifetime.

[Business Asset](https://www.financedigest.com/more-businesses-investing-in-assets-like-virtual-credit-cards.html "More Businesses Investing In Assets Like Virtual Credit Cards") Disposal Relief (the renamed Entrepreneurs’ Relief) has already seen the lifetime limit reduced from GBP 10 mn to GBP 1 mn in the 2020 Spring Budget. There could be further tweaks to qualifying criteria, the 10% [rate could be increased](https://www.financedigest.com/how-to-increase-repeat-purchase-rates-in-ecommerce.html "How to increase repeat purchase rates in eCommerce"), or more controversially, the relief could be abolished altogether.

Although the measures remain uncertain, the direction of travel ahead for CGT reforms will undoubtedly erode some of the upsides of entrepreneurship.

And, in some scenarios, it may be that [business owners looking to maximise value accelerate their exit plans](https://www.financedigest.com/crafting-a-business-continuity-cybersecurity-plan.html "Crafting a Business Continuity Cybersecurity Plan") now in anticipation of CGT reform.

**So, is now the [time to call it a day and wind things](https://www.financedigest.com/it-is-time-insurers-act-smart-by-making-legacy-systems-a-thing-of-the-past.html "It is time insurers act smart, by making legacy systems a thing of the past") up?**

The current CGT rules allow a tax-efficient [exit for a business](https://www.financedigest.com/exit-bee-hires-neil-stewart-as-business-development-director-as-its-client-roster-grows.html "Exit Bee hires Neil Stewart as Business Development Director as its client roster grows"), although that window of opportunity is narrowing.

The exit of the business owner tends to happen through a trade sale, [private equity investment](https://www.financedigest.com/procurementin-european-private-equity-investment-adding-value-to-the-boardroom.html "Procurement in European private equity investment – adding value to the boardroom."), management buyout, or the (increasingly popular) employee ownership trust (EOT).

However, another less complex mechanism for exiting a [business and generating](https://www.financedigest.com/foot-orthotic-insoles-market-to-generate-us-5-billion-by-2026-growth-key-business-strategies.html "Foot Orthotic Insoles Market to Generate US$ 5 Billion by 2026 | Growth & Key Business Strategies") a capital receipt involving a distribution of capital is via the members’ voluntary (solvent) liquidation process. Being a distribution of capital, the proceeds will be [taxed at current CGT rates](https://www.financedigest.com/factbox-the-uks-top-tax-rate-what-is-it-and-why-does-it-matter.html "Factbox-The UK’s top tax rate – what is it and why does it matter?") and subject to eligibility, qualify for Business Asset Disposal Relief.

Whilst we will always recommend seeking HMRC clearance to confirm the [business owner’s tax](https://www.financedigest.com/5-common-tax-mistakes-small-businesses-make-in-australia.html "5 Common Tax Mistakes Small Businesses Make in Australia") position, the basic tax position is that distributions made during a winding up are capital, not income, thus the shareholder is treated as having made a disposal of his or her shares in return for the amount distributed.

When applying for HMRC clearance, a [business owner would also be seeking](https://www.financedigest.com/businesses-seek-better-access-to-data-to-support-environmental-objectives-bright-data-research-reveals.html "Businesses seek better access to data to support environmental objectives, Bright Data Research Reveals") confirmation that the targeted anti-avoidance rules (TAAR), which aim to combat cases of “Phoenixism” do not apply to distributions made in the process of winding up of a company.

For completeness, “Phoenixism” is a practice where a company is liquidated, and subsequently, its [business is carried on under the same or broadly the same ownership via a new entity within a prescribed time](https://www.financedigest.com/isnt-it-time-open-banking-delivered-for-businesses.html "Isn’t It Time Open Banking Delivered for Businesses?") frame. These rules were introduced in 2016 and, if applicable, will tax any proceeds received via a liquidation distribution as an income and not a capital receipt. Obviously, this is not an issue if the purpose of entering into a members’ voluntary (solvent) liquidation process is due to the owner calling it a day!

In summary, the members’ voluntary (solvent) liquidation process should not be overlooked as an [effective means](https://www.financedigest.com/does-the-monzo-effect-mean-banks-will-need-to-rethink-brand-building.html "Does the ‘Monzo effect’ mean banks will need to rethink brand building?") to triggering a capital receipt. We fully [expect an increase in enquiries from business](https://www.financedigest.com/t-mobile-sells-wireline-business-to-cogent-for-1-expects-hefty-charge.html "T-Mobile sells wireline business to Cogent for , expects hefty charge") owners and their advisors as the race to exit and extract value from their businesses intensifies in the months ahead, with the shadow of CGT reform looming large once more.

Our [Corporate Simplification](https://www.financedigest.com/clearing-out-your-garage-benefiting-from-corporate-simplification-2.html "Clearing Out Your Garage – Benefiting from Corporate Simplification ") team’s experience working with shareholders to maximise their returns tax, cost effectively and expediently puts us in pole position to help you and your clients implement their business exit. As ever, early consultation is recommended to ensure desired timelines are achieved.


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