How will the rumoured Capital Gains Tax raid affect EOTs
Rumours have been circulating in the UK press about an increase in capital gain tax rates in late 2020. We consider the implications of these rumours for EOTs (Employee Ownership Trusts) and the attractive capital gains tax relief presently available for business owners.
What are the rumours?
TheTimes reported on 30 August 2020 that:
- “the government is planning to raise … capital gains tax”
- “the Budget blueprint would force people to pay capital gains at the same rate they pay income tax”
- “’officials are now working up plans to equalise capital gains and income tax’ one official revealed”, and
- “Steve Barclay, the chief secretary to the Treasury, refused to rule out any tax rises today but suggested ministers were focused on stimulating the economy”.
The remainder of the article refers to the journalist’s own commentary on the changes, and discussion of other taxes.
The Times further reported on a meeting between Rishi Sunak and new Tory MPs that the government was going to have to make “difficult” decisions to recover from the pandemic and that the Tories should not “simply borrow our way out of any hole”. This was reported on 3 September 2020.
How reliable are the rumours?
Although the article was written by a Tim Shipman, a senior journalist, there is no source for the first two quotes above. The third source (on equalisation of capital gains and income tax) is attributed only to “one official”.
It’s clear from the lack of attribution that, if this is a deliberate leak from the government, it is not one that the government wants to be linked to. It seems likely this is a very tentative first step in gauging public opinion on increases in capital gains tax, and there’s a long way to go before this becomes official policy.
What’s the background to these rumours?
Rishi Sunak ordered a review of capital gains tax on 13 July 2020 by the Office of Tax Simplification (OTS). The scopingdocument (published the next day) did not suggest there would be any increase in overall capital gains tax rates, with the review focusing on simplification and correcting any distortions in behaviour caused by capital gains tax.
The Treasury Select Committee launched an inquiry into ‘Tax after coronavirus’ on 17 July 2020 and heard oral evidence on 1 September 2020. There seemed to be broad consensus that equalisation of tax rates between capital gains tax and income tax was a good thing in principle, although in practice it would be hard to achieve and (according to Paul Johnson, director of the Institute for Fiscal Studies) it would “not raise you very large amounts of money”.
What’s the likely impact on EOTs?
The capital gains tax relief enjoyed by vendors has been an essential part of the government’s policy to encourage employee ownership. Business owners currently face a 20% tax rate on a sale of their business, but enjoy 100% tax relief if they sell to an EOT.
There is no suggestion in any of these articles or the OTS review that there would be any change to the EOT tax relief or the underlying policy.
If an increase in capital gains tax rates does go ahead without any change to the EOT relief, the value of the EOT tax relief will be greater, and so there will be an even greater drive for business owners to sell to an EOT.
Nigel Mason, corporate finance director at RM2, commented that “The EOT tax relief for business owners is key to encouraging business owners to sell to their employees and creating a fairer economy. The relief needs to be considered in the wider context of EOT taxation – it’s a structure that encourages generous taxable bonuses to be paid to employees, and significant tax to be paid if and when an employee owned business is sold. I have no doubt that the cost of initial EOT tax relief is more than outweighed by the increased activity and greater taxes paid over the long term. Everyone wins”.