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”.

If you are a business owner and would like to speak to us about how an Employee Ownership Trust might fit your organisation contact us at enquiries@rm2.co.uk or download our free EOT factsheet.