It is difficult to read the news without tripping across speculation in relation to the Budget and what levers Rachel Reeves may pull to generate additional tax income and fill the "black hole" on Budget day (30 October 2024).
The government has given itself limited wriggle room in terms of raising certain taxes given their election manifesto that they would not raise income tax rates, national insurance or VAT – at least to the extent those taxes affect "working people" (however that is interpreted).
That has led to a widespread concern/expectation that the Chancellor will increase the rate of capital gains tax or make amendments to the current business assets disposal relief regime. This has led some individual business owners to consider selling their company, business or assets in advance of any Budget changes.
It is difficult to predict what changes there might be, but if you do wish to sell up before the Budget under the current capital gains tax rates, tax advice should be taken on potential implications as it is not always as straightforward as it might seem.
Selling before the Budget – timing
We don't know if capital gains tax will be increased or changed and we don't know the timing of when any change would be effective. However, it is possible that any change could be given immediate effect on Budget day. If you wish to ensure that you sell under current capital gains tax rates and dispose of your asset before the budget, you would need to conclude an unconditional contract for sale before the changes become effective (let's assume 30 October 2024), even if it is completed afterwards. Concluding an unconditional contract sets the timing for disposal for capital gains purposes (although there can be some complexity for deferred consideration as detailed below).
What is an unconditional contract for capital gains tax ?
Not all conditions are equal in this situation and there is a difference between a condition precedent – one which needs to be fulfilled in order for there to be a contract at all (e.g. a buyer agreeing to buy your shares, subject to third party consent) and a condition subsequent – one which does not prevent there being a contract before that condition is met. If a contract has unmet conditions precedent it is not an unconditional contract for sale.
If you are planning on entering into a contract which will not (or may not) complete before the Budget and you wish to ensure that a disposal is triggered for capital gains tax purposes before the Budget, it is worth taking advice on whether the terms of your contract will achieve that.
Deferred consideration and earn-outs
The point at which deferred consideration becomes liable to capital gains tax is more complex, and depends on a number of factors.
For example, where a seller of shares has agreed to receive part of the consideration by way of an earn-out (payable in cash) this would result in a capital gains tax liability based on the value of the earn-out at the date of disposal (which may be low) followed by a further disposal when the earn-out is paid. So even if there is a disposal for capital gains tax purposes before the Budget, this could mean that a chunk of your earn out could be subject to capital gains tax at post Budget rates. This should be considered and advice taken when negotiating the terms of the disposal and any earn-out consideration.
If you sold your business a number of years ago, but the earn-out payment is due on or after the Budget you may need to pay capital gains tax at the post Budget rates, unless there is any flexibility to negotiate to amend the terms of your earn-out payment so that it is agreed and paid before the Budget.
Consideration which is deferred but is a known amount (even if contingent) will be treated in the same way as any up front consideration for capital gains tax purposes and so would be likely to lock into the pre-Budget tax rates if there is a pre-Budget disposal. However, that capital gains tax liability would need to be paid with no discount available to take into account the deferral (although in some cases HMRC may agree to payment by instalments). This also applies to "completion accounts" adjustments in share sales. Adjustments to the capital gains tax liability can be made if the consideration is ultimately not paid.
Sale of shares for share or loan note consideration
Where some or all of the consideration for a sale of shares is paid in shares or certain types of loan notes (including earn-out consideration which is satisfied in shares), the point of disposal for capital gains tax may be deferred until the consideration shares are sold or loan notes repaid (the gain on the sale shares being "rolled over" into the consideration shares or loan notes). If consideration shares are sold or loan notes redeemed after the Budget, it will mean the capital gains tax liability will be based on post Budget rates of capital gains tax
Election to disapply "rollover" treatment
Often in share sales the seller will wish to ensure that this "rollover" treatment applies to avoid having to pay tax before cash proceeds are realised. However, where a seller is entitled to claim business asset disposal relief on the sale of shares, the tax treatment may be better if they elect to be taxed based on the original date of disposal of the shares. Sellers who were able to claim business asset disposal relief on their original disposal have a period of one year after the 31 January falling after the tax year of disposal in which to decide whether to make an election and pay capital gains tax in advance of the sale of their consideration shares or redemption of the consideration loan notes.
Those who have previously sold shares in exchange for share or loan note consideration and who are still able to make an election may wish to consider doing so in order to lock into pre-Budget tax rates (although we do not know if there will be flexibility to do so after the Budget as it is possible that changes are made to the election regime).
If you'd like to discuss the potential tax implications of selling your business or assets, please get in touch with a member of the corporate tax and incentives team or your usual Brodies contact.
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