The budget for broad shoulders

The first budget of the new government is fast-approaching, and comments from the Prime Minister and Chancellor in recent weeks have painted a gloomy picture of the country’s finances and left many feeling, if they weren’t already, that tax rises are inevitable. The government has pledged to keep current rates of income tax, national insurance and VAT, which puts other revenues sources, most notably capital gains tax and inheritance tax, in the firing line.

Whilst the government might be under-promising so that they can over-deliver in October, recent statements have been of major concern to many of our clients, the vast majority of which are owner-managed businesses and their shareholders. Whilst there has been plenty of commentary recently regarding what Rachel Reeves might, or should, do to plug the ‘£22bn black hole,’ here we focus on a couple of things that she shouldn’t do and the reasons why.

Don’t change capital gains tax rates across the board

An increase in CGT rates has been feared by business owners for a while now, with no action taken by any of the seemingly endless supply of Chancellors to deliver budgets or spring/autumn statements over the past few years. Various studies suggest that aligning CGT rates with income tax rates, or otherwise increasing them substantially, would alter behaviour to the extent that the tax take would actually be lower. This could be through taxpayers moving offshore to escape the CGT net, or by simply deciding not to sell their business or other assets.

If M&A activity reduces as a result of tax policy, it’s conceivable that we end up in a situation where private businesses remain under ownership of individuals who no longer have the motivation or appetite to run and grow those businesses, resulting in stagnation which would be detrimental to the UK’s economic growth.

The churn of M&A activity and Private Equity investment is enormously valuable to business, and the ideas, ingenuity, aspiration and motivation they promote are important cogs in the economic machine as they encourage business growth and employment. Increasing CGT rates on sales of other assets, such as property, chattels and listed shares, might be more palatable, but our view is that it’s crucial that there remains a tax incentive for entrepreneurs to encourage them to take risks, grow value and employ more people, all of which the country will benefit from.

Don’t abolish Business Property Relief

Another example of a tax rate or relief that taxpayers have in recent years feared might be changed, BPR (subject to qualifying conditions being met) provides 100% relief from inheritance tax on shares in trading companies.

Inheritance tax take is on the increase, with more and more taxpayers being caught in the net as asset values rise whilst the tax-free nil rate band has been frozen for over 15 years. With more and more ‘ordinary’ people falling into the charge of a tax which is generally very unpopular and viewed as unfair by many, it would make sense politically to take tax relief away from wealthy shareholders. However, this could be disastrous for business.

The objective behind BPR is to ensure that businesses do not need to be broken apart or wound up to fund inheritance tax bills on the death of a shareholder, and so it is a very valuable and important relief. Were it to be abolished, it could result in difficult decisions having to be made by business owners and their descendants, with the worst case scenario being businesses wound up, with employees made redundant, to enable the beneficiaries of the estate to pay huge inheritance tax liabilities.

Again, whilst the government is clearly looking to increase tax revenue, it is essential to leave reliefs available to entrepreneurs and business owners to ensure that the economy can survive and, hopefully, begin to thrive. Other, softer amendments to BPR could be considered, such as requiring a certain percentage shareholding to be held as a qualifying condition (currently there is none) as is the case for CGT’s Business Asset Disposal Relief, which could bring passive and minority shareholders within the charge to inheritance tax but would ensure major shareholders who are genuinely driving the business are protected. For example, shares held in AIM-listed companies currently qualify for BPR after they have been held for two years, and there’s certainly less of a justification for retaining this tax advantage as a benefit to the economy.

All eyes on 30^th October

The Chancellor is in an unenviable position as we approach the Budget, faced with the urgent requirement to restore order to the public finances, the need to avoid alienating an electorate which has just voted this government into power, and the importance of revitalising and stimulating the UK economy. It will be a difficult, and perhaps impossible balancing act to pull off, and we will look on with keen interest, hoping that short-term thinking and the lure of crowd-pleasing headlines do not come at the expense of entrepreneurs and business owners, and that their contribution and importance to the economy are not overlooked.