In this episode, we’ll explore the taxation changes expected in the Autumn Budget. We’ll focus on the rumoured adjustments to Capital Gains Tax (CGT) Business Relief and carried interest, examining the potential impact on owners and shareholders, as well as the current effects on PE and M&A markets. Chairing the latest episode is Jennifer Allison, Corporate Tax Partner and lead of our national corporate tax compliance team advising mid-market businesses from creation through to exit. Joining Jennifer is: Zoe Davies, Personal Tax Partner, with over 20 years of experience advising on personal and business tax planning, compliance, and strategic matters. Paul Joyce, M&A Partner, who focuses on mid-market, UK and international transactions across a range of sectors, advising management teams and owner managers, private equity investors and corporates.
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00:00:06:03 - 00:00:31:20
Unknown
Hello and welcome to our fifth episode of our first 100 Days in Office podcast series. In this series, we're going to delve into the Labour Party's policies and how these could impact sectors, businesses and individuals. In today's episode, we're going to focus on business taxation. In particular, Rimmer changes to CGT and business relief and the impact on owners and shareholders.
00:00:31:22 - 00:01:01:04
Unknown
We're also going to look at how these potential changes are already causing angst in the market. So I'm Jan Allison, corporate tax partner, and today I'm joined by Zoe Davies, private client tax partner, and Paul Joyce M&A partner. Zoe, if we come to you first. It seems that every day a new budget rumour is making the headlines. Before we delve into the specific tax changes, is there any advice you'd give to clients to help ease their concerns?
00:01:01:06 - 00:01:20:10
Unknown
Absolutely. Thanks, Jen. It's really been an anxious time. Both from a personal and business perspective. And what I tell my clients, is we we don't know for sure what's going to be announced. We can't. What we can do is plan for anything. And really, that's what you should be working with your advisers to do.
00:01:20:12 - 00:01:38:13
Unknown
And and making sure that you're, you're ready for whatever might come. Having plans that are built for the long term, built to withstand any legislative change that's coming through. And not making any kneejerk decisions purely based on fear and really thinking about the impacts over the longer term and where you want to be in the longer term.
00:01:38:15 - 00:02:04:02
Unknown
Thanks, Zoe. I would completely echo this sentiment. It really is important that you think about the long term impact as to what that immediate reaction. So moving on to what we could see in the budget on 30th October. CGT rates are being touted as one of the biggest changes, with an increase in rates highly likely. So can you talk us through what a rate change would mean for business owners?
00:02:04:04 - 00:02:26:16
Unknown
Yeah, absolutely. And to some extent capital gains tax has already been squeezed. Really. There's been a reduction to the annual exempt amount, increases in the capital gains tax rates that have been applied to certain assets, such as residential property. And there's been a reduction in business asset disposal, relief for trading business and other assets. So really now we're expecting a CGT rate increase.
00:02:26:16 - 00:02:59:11
Unknown
That seems the most likely, worst case scenario for that would be the alignment of capital gains tax rates with income tax rates, which we had historically. We could also see different rates for different assets, things like residential property investment and business assets, for example, as different classes and different CGT rates corresponding with those. If we did see that increasing capital gains tax rates, we would also expect that to be coupled with an increase in things like business asset disposal relief on selling your business, currently at a million as a cap.
00:02:59:17 - 00:03:25:11
Unknown
So, there is that and Labour could also increase tax paid on dividends. For example, another likely move from Labour could be the removal of principal private residence relief, which applies to disposals of an individual's only or main residence in the UK, which would be quite a significant change to the current, procedures. It could, however, be replaced with a rollover mechanism or the introduction of a cap to that relief.
00:03:25:13 - 00:03:51:19
Unknown
Typically the home is a protected asset. So this really would be a significant change for the new government. On death. Labour could remove the capital gains tax uplift from assets that qualify from, inheritance tax, including businesses, agricultural property transfers to spouse, etc. if this did happen, Labour would really need to consider how this is introduced without forcing the Break-Up of a business and similar assets.
00:03:51:21 - 00:04:12:19
Unknown
In order to pay the death taxes that would result as this would be a significant change. Who I know that in discussions we've had with businesses that are planning to sell, capital gains tax has been a real area of concern. How are you seeing that impact the M&A market at the moment? Yeah. Thanks. So, I'd agree that it's definitely causing a lot of concern.
00:04:12:19 - 00:04:30:08
Unknown
I mean, it's probably the first question we get asked for most of the businesses and business owners that we speak to, what's going to happen on the 30th October? So I'm like, the crystal ball has been, has been dusted off and and is working at and over time to see if we can work out what the answer to that is.
00:04:30:10 - 00:04:46:13
Unknown
I think if we take a step back, though, and think about what it means for the market, is that we've had a period for probably 12 months where, M&A activity has been depressed. We've had rising interest rates, we've had inflationary pressures, and I think people have just wanted to wait and see what was going to happen. We're starting to get a bit more certainty in the market.
00:04:46:13 - 00:05:02:23
Unknown
But and as soon as we've got that, we've suddenly got this, risk hanging over people of a rise in capital gains tax rate, which obviously has a big impact on the cash that ends up in somebody's pocket when they sell a business. So what we're suddenly seeing is a lot of people picking up the phone and saying, should we sell our business now?
00:05:02:23 - 00:05:24:15
Unknown
What should we do? Can we make it happen before the budget? Can we make it happen before the end of the tax year? I think if you're going to want to do something that that executes and and crystallises again before October, it's going to be very, very difficult. And I almost say impossible. And frankly, the value you probably lose, what outweigh any, any changes in tax rate?
00:05:24:17 - 00:05:49:11
Unknown
I think if we're talking about, the end of the tax year, we've got a bit more time. So I think then, you know, structurally is possible. And I think, you know, we would certainly favour, an approach that was a bit more staggered in that, in that respect. I think what would happen, though, is as we get closer to any deadline, clearly the, negotiating power begins to shift from the seller to the buyer, knowing that the seller has to sell before the tax rate changes.
00:05:49:12 - 00:06:09:16
Unknown
We're going to be very careful, managing those processes to make sure we don't get a large price ship or some, some change in the deal structure just before, with due to us on the transaction. So it definitely adds a lot of uncertainty and a lot more complexity into the deal doing process whole. That's, some key observations there about what you're seeing in the current market.
00:06:09:18 - 00:06:29:00
Unknown
Given the impact that the changes could have on any business sale, what do you think the right approach would be for the government to take here? I think that any business owner in any business wants to be had a plan with a degree of certainty. So I think the risk of sudden changes is never helpful. It makes it very difficult to plan and the medium and long term.
00:06:29:00 - 00:06:49:10
Unknown
So from an M&A perspective and from a market perspective, I think having a gradual phase change over a period of time, allowing people to transact an orderly fashion is, for me has got to be the right answer. So what does that mean in practice? Well, it could mean a graduation of, of, rises in rate. So it could mean that it comes in at a set period in time.
00:06:49:10 - 00:07:12:20
Unknown
But sometime in the future, for example, the next tax year. And what that gives people, the opportunity to do if you're thinking about selling the business, is to get that done prior to the 31st of March next year, and then crystallise it at the current tax rate. I think if you're thinking longer term, I think that, you know, you've got to weigh up the difference between the potential growth in the business, and the potentially increase in tax rates.
00:07:12:20 - 00:07:28:11
Unknown
And, frankly, you know, over a period of 5 to 10 years, there may well be other changes in government and other changes in tax rates. So I think the key for me is not to rush into doing anything. Now, if your plan is to hold the business and run the business next ten years, I think stick to that plan.
00:07:28:13 - 00:07:49:16
Unknown
If the plan was to sell it in the next year, I think it's really start to think now whether actually you should be starting to put something in place today rather than, waiting for six, 12 months and seeing what happens. Thanks, Paul. I'd really like to think that any changes would be introduced post April 25th, but as you say, we won't know until the 30th of October, so we'll have to tune in.
00:07:49:18 - 00:08:15:20
Unknown
Zoe, in relation to private equity, the carried interest loophole has also made the headlines and a call for evidence. What could the tax impact look like here? Thanks, John. Yeah? The Chancellor has announced a commitment to take action, in respect of what they have called this carried interest loophole. So carried interest is a performance related bonus, effectively, usually in the private equity industry.
00:08:15:20 - 00:08:43:09
Unknown
And unlike other bonuses, which would usually be subject to income tax, and potentially national insurance. So 45 or 47% of income tax, with National Insurance carried interest can currently be taxed at capital gains tax rate. So that's 18 or 28%. And the idea would be that they're likely, to increase that or to align it, to income tax rates.
00:08:43:10 - 00:09:07:08
Unknown
Paul, what impact could this have in the private equity space? I think it's fair to say that the private equity industry in the UK has absolutely exploded over the last 20 years. The number of funds has grown exponentially over that period of time. And there is no doubt that they have enjoyed the benefits of of carried interest being taxed as capital.
00:09:07:10 - 00:09:25:18
Unknown
And you wouldn't be surprised to hear that all the private equity investors I speak to, see this change as being quite likely. Now, I think the writing has been on the wall for a little while in terms of what the impact is going to be, it's quite difficult to call that. Do I see, the product industry collapsing?
00:09:26:00 - 00:10:03:04
Unknown
Absolutely not. There is still a huge opportunity and requirement for investment in in mid-market businesses and owner managed businesses. And I think that's going to continue for the foreseeable future. Do I think that there's going to be at the margins, some pressure on a number of private equity houses, and the interest in going to private equity from, you know, our high flying individuals and graduates would be diminished because there's a change that's actually I suspect there could well be the company obviously needs to be very careful to balance up the increase in tax take from the effect that this will have in terms of investment, you know, in managed businesses, in
00:10:03:04 - 00:10:18:16
Unknown
the UK. And I think that's going to be a really fine balance. I suspect that we're going to see a change in rate. And I think probably it's going to be the right change. But hopefully we're not going to see, a decline in the investment because that would be really damaging, I think, to the UK economy.
00:10:18:18 - 00:10:44:15
Unknown
Zoe, another tax change that could have major consequences is business relief. I understand that this relief was brought in some time ago in the 1970s, but it looks like these changes could completely overhaul the relief. Yes, absolutely. Have really been rumours, of a of a significant change, to business property relief. It's a really valuable, inheritance tax relief for business owners.
00:10:44:15 - 00:11:07:05
Unknown
It's it's on everybody's agenda. If they are a business owner. And, you know, it could now be kept, for example, 500,000 per person. This would be a drastic move, from the current system we have where it's unlimited, business property relief can provide 100% relief on qualifying business assets, which is normally shares in a trading company.
00:11:07:07 - 00:11:42:07
Unknown
Capping business property relief can have a catastrophic impact on business owners. It's the, you know, the most damaging possibility, the assets that need to be sold, to fund the tax bill, which is the whole reason the the relief was in place to start with. So the government will really need to consider how they balance the need for increased tax revenue, which we will all understand, but with the importance of supporting the business community and not forcing sales, just to fund that tax bill and breaking up businesses, which have no doubt employers and, and, you know, have a bigger role in the community.
00:11:42:09 - 00:12:10:08
Unknown
So an alternative to a cap, might be just to tighten the criteria on what could be considered qualifying for business property relief purposes. So it could exclude certain activities or, it could, look at particular assets that were within the business, and, and have more scrutiny over those aspects. It resulting in the need for the business owner to consider separating things out, with what could be perhaps investment assets into different entities.
00:12:10:10 - 00:12:31:14
Unknown
Labour have promised that they will provide a business tax roadmap within six months of being elected. So whilst we do expect changes, these probably are unlikely to be implemented immediately, giving individuals, family and and businesses some time to plan, which just relates to what Paul was saying in respect to that would be the advice in the M&A market as well.
00:12:31:19 - 00:12:57:23
Unknown
No knee jerk reactions. Thank you both. That's really interesting. I think we can comfortably conclude that if the rumours are indeed true, the changes to business taxation concerning both business taxation and sale could have a significant impact on UK businesses. So thank you for listening to today's podcast. We hope you have enjoyed it. Please remember to like, subscribe and leave a review after listening.
00:12:58:01 - 00:13:17:07
Unknown
Our next episode of the first 100 days podcast series will be released on Friday the 25th of October, only a few days before Labour's first budget. During this episode, our tax experts will be giving their views on the budget predictions and what could realistically see. Announced on 30th of October.