On 30th October the Chancellor will deliver her first budget and speculation on the potential fiscal changes is mounting. What we do know though, there is a reported £22bn blackhole that needs to be filled.
The Autumn statement is set for 30th October and those within the professional community are bracing themselves for what could be a significant shakeup of the tax system. The Chancellor of the Exchequer, Rachel Reeves has identified a £22bn black hole in the country’s finances and having ruled out increases to income tax and National Insurance, she is expected to increase Capital Gains Tax (CGT), as part of a wider focus on capital taxation.
With these potential changes on the horizon, now may be the time to make the asset or share transfers between generations or entities, or consider bringing forward a sale, to crystalise the tax treatment under the current regime. However, for some, this may trigger a CGT charge and particularly where an asset is being transferred, rather than sold to a third party, there may be a need for finance to fund the CGT charge.
The continued impact of more expensive borrowing
Unfortunately, the higher costs of capital or borrowing, whether that’s for a business, property, shares or other assets, has over the last two years continued to ‘shake out’ the current business and entrepreneurial environment, which for the last 17 years has benefited from cheaper lending being available.
In turn many ‘Zombie’ businesses, those who have been ticking along operating on cheap debt and not forced to make changes, will feel uncertain about their future. Several will either fold or be absorbed by other successful competitors which could, however, help unleash the productivity improvement that has been missing since 2008.
What pre-emptive steps are business owners and private investors taking?
We have seen an increase in the strategic disposal of assets, including investment portfolios, Buy To Let (BTL) properties, family businesses, holiday and second homes, and other investment property. Those with multi-generational businesses and assets which they will ultimately wish to transfer to the next generation are bringing forward their plans too.
Bank finance could in part replace the desire to sell assets
If CGT rates increase significantly, or worse still, they are brought into line with marginal income tax rates at 40% and 45%, then many asset owners may decide to retain the asset in favour of raising debt against its value. For example, take a residential investment property that was purchased in London in 1999 for £1.5m and is today worth £4.5m after 25 years of growth and inflation. In simplistic terms, a 40% CGT charge on the £3m of asset appreciation would result in a levy upon sale of £1.2m. Therefore, the net proceeds upon sale would be £4.5m less £1.2m paid in charges, leaving £3.3m.
Alternatively, the property owner may decide to retain the asset, its income and defer the CGT charge in the hope that a future government may reduce CGT rates. In the meantime raising debt against the properties’ full value to meet their need for capital and the income services the loan interest. For example, a loan at 60% of market value could release £2.7m of equity, which is not far short of the net proceeds of £3.3m if they sold and paid the CGT bill.
What could CGT hikes mean to the Private Equity market
Private equity and buyout fund managers who receive a share of profits from asset sales called ‘carried interest,’ will also be impacted by the planned CGT hike. Carried interest, which has boomed in recent years, is currently taxed as a capital gain at 28%, rather than as an income, which at the top rate is 45% plus national insurance. Just like the previous example, an increase to CGT rates, whether they are brought in line with higher rate income tax thresholds or not, could be significant to how the market reacts, given that there are 2,550 private equity executives in the UK, making a total of £3.4bn in carried interest in 2020-21 according to data from one law firm.
Increasing activity
At this stage we can only speculate what the Chancellor might introduce on 30th October and therefore it could be easy to overreact, which might in turn be a wrong move. Certainly, the political rhetoric has encouraged more sales activity in the market over recent weeks and this has in turn resulted in our sector receiving higher levels of finance enquiries to assist with asset purchases and transfers of ownership within businesses and families.
