Corbyn is in and capital gains tax is 50%!

This is not actually true but read on……

The issue

Halloween was yesterday, although the spectre of a Corbyn led hike in tax rates is still filling many entrepreneurs with dread. Forget Freddy Krueger and ‘A nightmare on Elm Street’ – Corbyn as PM could represent a very real nightmare on Downing Street for business owners. We are getting many calls from frustrated entrepreneurs who are hoping to sell over the next two years but who are concerned that the current very generous capital gains tax regime may be overturned. Just imagine the nightmare scenario of a shareholder being taxed at 50% on a £1m gain compared to current rules which could give rise to a tax charge of only £100,000.

Locking in tax rates

It may be possible to have the option of locking in current tax rates by introducing a new holding company. This would involve a new company acquiring the existing company through a share for share exchange. Although the default position here is that there is no disposal for capital gains tax purposes (with the shares in the new company standing in the shoes of the shares in the old company), where Entrepreneurs’ Relief would otherwise apply it is possible to make an election to disapply these share for share provisions by a year after 31 January following the end of the tax year.

Example

Jim anticipates making a £10M gain in respect of the disposal at the end of 2020. Based on current rules he is happy that he would qualify for Entrepreneurs’ Relief and therefore he would pay tax of £1M. He is however extremely worried about Corbyn and the prospect of a £5M tax charge (!).

Following advice he introduces a new holding company through a share for share exchange (selling his shares to a new company in exchange for shares in the new company) in November 2019.

In March 2020 Corbyn increases capital gains tax rates to 50% with much aplomb.

Jim heaves a sigh of relief because he knows that he can elect to trigger the gain in November 2019 and thus rebase his shares in the new company for capital gains tax purposes.

In January 2021 Jim  ends up selling the new company. Given his election capital gains tax is only payable in respect of the extent to which the proceeds exceed the November 2019 value (and they don’t). Therefore tax is payable at 10%.

If Corbyn hadn’t got in and he decided that rate changes weren’t on the horizon then Jim would hope to rest on the share for share treatment, although he would have until 31 January 2022 to fully decide on his course of action.

Forbes Dawson comment

There is an interesting (almost philosophical) point around this form of planning. HMRC do have the power to disapply share for share treatment if a transaction is entered into for the avoidance of tax. Does an attempt to lock in a current tax rate constitute tax avoidance? If it does then any avoidance would only occur through disapplying the share for share treatment which paradoxically is the only measure that HMRC has available to attach any perceived avoidance. It would be interesting to see what HMRC’s response would be to a tax clearance which details the main commercial reason for the transaction as locking in tax rates. However the clock is ticking………………………….

 

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