Prepare now for increase in CGT rates

Jan 20 2010 by Shawn Bone, The Journal

THE next government will be presented with the major challenge of addressing the UK's public finances.

Increasing Capital Gains Tax (CGT) is likely to be on the agenda, regardless of which party wins power, as politicians look to balance the books.

With the potential for two budgets in 2010, CGT rates could increase to 25% or more from April 2011.

Any hike in CGT has the potential to not only bolster the public finances but also address the yawning gap which exists between the current 18% CGT rate and the new 50p top rate of income for high earners.

When Alistair Darling reformed CGT in 2007/8 there was a swell of CGT receipts to £7.8bn, driven predominately by private company shareholders looking to realise their shareholdings before the increase from 10% to 18% came into effect.

These receipts dwarf the anticipated £2.2bn for the current tax year as many entrepreneurs have chosen to postpone an exit due to the economic climate and reduced business valuations.

In 2007/8 many entrepreneurs took their business to market too late, driven by the CGT tax changes, and found themselves completing their transaction extremely close to the April 4, 2008, deadline as they attempted to avoid incurring an additional CGT liability arising from the increase to 18%.

Correctly planning for and managing a sale process is essential to mitigate the risk of purchasers attempting to reduce prices or restructuring the terms of a deal as the tax deadline approaches.

If a full exit is not appropriate or desirable, vendors may look to crystallise some of their value to achieve a lower tax rate through a partial sale of shares or “cash out”.

This type of transaction can allow shareholders to lock in the lower tax liability while also creating liquidity outside of the business. Shareholders are then able to benefit from any appreciation in the business if it continues to grow.

Time invested in considering an exit strategy and preparing a business for sale can reap material benefits to business owners.

If CGT rates are to be increased from April 2011 now really is the time to start getting your business ready for sale.

Shawn Bone is a partner with BTG McInnes Corporate Finance