17th November 2020
First some good news: it was announced late last week that businesses will continue to benefit from 100% upfront tax relief on the first £1 million of capital expenditure in an accounting year.
The Government has extended the current Annual Investment Allowance (AIA) of £1 million for expenditure on plant and machinery, originally due to decrease to £200,000 on 1 January 2021, for a further year – to 1 January 2022.
It is hoped that this will stimulate investment in UK manufacturing, property purchases, developments and refurbishments over the next 12 months.
Groups of companies should review this expenditure across the whole group, as AIA can only be applied once between them. Planning the timing of expenditure on plant, equipment, fixtures and fittings carefully can ensure that you make the most of the opportunity to claim 100% tax relief.
While the Government has been providing support to businesses during the COVID-19 pandemic, there is much speculation about how it is going to recoup some of that money. One substantial rumour is that it’s going to make a significant increase in Capital Gains Tax (CGT) at the next Budget.
Capital Gains Tax is the levy you pay on the profits – or gains – that you make when you sell, give away or dispose of something you own, such as shares or property.
A new 136-page report from the Office of Tax Simplification (OTS), commissioned by the Chancellor, Rishi Sunak, suggests that around £14 billion could be raised for the exchequer, by doubling Capital Gains Tax rates and cutting current exemptions.
This would impact thousands of taxpayers, who could see less returns on selling second homes or their investments.
Further recommendations include removing relief for investors selling shares in unlisted companies, replacing Business Asset Disposal Relief (formerly Entrepreneurs’ relief) with a more focussed retirement relief, and removing the capital gains tax uplift allowed for assets which are subject to Inheritance Tax.
The OTS says Capital Gains Tax (CGT), which is currently levied at 10% for basic-rate taxpayers and 20% for higher-rate taxpayers, could be brought more into line with income tax rates (20%, 40%, and 45%).
Additionally, under current rules the first £12,300 of Capital Gains is exempt – any reported gains are not taxable up to this threshold. It is being recommended the Government consider reducing the £12,300 allowance to between £2,000 and £4,000.
For higher-rate tax payers, the tax rate for non-residential property and most other assets (excluding cars) over £6,000 is 20% and for residential property it’s 28%. If, for example, the Government were to increase CGT for residential properties from 28% to, say, 40%, this is going to significantly increase tax costs for many taxpayers.
The current proposals may also hit owner-directors of smaller companies who often hold cash within their businesses for use as a pension when they retire, with increased tax rates proposed on such accumulated balances.
Whilst nobody has a crystal ball to forecast whether this speculation will become reality, the Government will need to claw back capital somehow and CGT is a likely target.
Our advice is to be prepared by having a good handle on your financial situation.
The Wise team are here to assist you to mitigate the tax cost which might arise if the proposals recommended in the OTS report are confirmed in the budget next spring.
Sharmini is Wise & Co’s managing partner. She joined the firm in 1989 and became a tax partner in 1997. Sharmini specialises in providing owner managed businesses with strategic consultancy and tax advice. She is a first class communicator, which is essential to delivering the high quality service that Wise & Co prides itself on.
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Thank you for your understanding. We wish everyone safe and well as we weather these difficult times together.