Take your capital gains while you can

Take your capital gains while you can

The government has spent £300 billion so far trying to fight Covid-19 and there is no doubt that at some point in the near future, they will need to raise taxes in order to balance the books. The Conservative Government made manifesto commitments not to raise income tax, national insurance or VAT and they will want to do everything they can to honour these promises. As a consequence, the first taxes that are likely to rise are the taxes that they believe are paid mostly by the rich, specifically inheritance tax and capital gains tax. These tax rises could have far reaching consequences for estate agents and letting agents. So what should you be doing to protect yourself and your clients from these tax rises?

The message to vendors should be to sell now before tax rates increase. Every agent in the country has dozens or even hundreds of vendors who are dithering about whether to sell their property or not. So now would be a great time to write to them or phone them. If they are selling a second home, or an investment property, you can warn them that capital gains tax rates could rise from 18% or 28% to as much as 40% or 45%. So now is a good time to sell. If they are downsizing and planning to give part of the sale proceeds to their family by way of a potentially exempt transfer, you could warn them about possible changes to the inheritance tax rules. These may well change to prevent people from giving money away in the future. It may even be worth mentioning that there have been stories in the press about the possibility of the government taxing the profit that people make when they sell their primary residence.

For landlords, most particularly those with multiple properties, you might suggest that they consider transferring their properties into a limited company in order to protect themselves against a future increase in CGT rates. Most landlords will not take action on this but they will thank you for taking the time to discuss the matter with them. Perversely, an increase in CGT rates would have the effect of locking landlords into their buy to let investments as they would be very reluctant to sell if CGT rates were to rise to 40 or 45%.

In my own business, we have dealt with a huge number of business owners over the last three months who wanted to sell their businesses before the tax on the sale increased from 10% under the Entrepreneurs’ Relief Scheme to as much as 45%. We originally thought that this was going to happen in the Autumn Budget in November. This budget was postponed but the threat has not gone away and if changes are made, they will probably now be made in the Spring Budget next March.

There is a superficial logic in saying that everyone should pay the same rate of tax on all the income that they earn regardless of whether it is earned as income or as a capital gain. However, in practice past experience demonstrates that tax rises designed to hit the rich do not raise any money. The salaries that people get every month is the money that they need to live on. It can’t be deferred or disguised. The timing of a capital gain, however, is wholly within the control of the taxpayer and if tax rates double or quadruple, then people will just hold on to their assets and the government will receive 45% of nothing.

I really hope that the government will leave capital gains tax rates alone but in these unprecedented times, anything could happen so if you are thinking of disposing of an investment property or shares or are thinking of selling your business, then the time to do it is right now.

I wrote an article for Property Industry Eye on this subject last year and one of the trolls said that I had written a sensationalist article for my own benefit. Just a few months later, the lifetime limit for Entrepreneurs’ Relief was reduced from £10 million to £1 million. The impact on someone selling a £10 million business would have been an increase in their tax bill of £900,000.

If capital gains tax rates are aligned with income tax rates, the tax on the sale of a £1 million business could skyrocket to £450,000. If you want to avoid this risk, you really do need to take action.

Adam Walker is a management consultant and business transfer agent who has specialised in the property sector for more than thirty-five years. 

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