Tax plays a hugely important role for any government since this is its main source of income and is used to attain certain policy goals. Tax is also important to my OMB clients, many of whom will be looking to exit their business at some point.
Over the last few years, the UK economy has seen better days as we’ve dealt with high inflation, increasing interest rates and the circus that was presented to us by Liz Truss and Kwasi Kwarteng. 2023 felt hard, as there was a general sense of uncertainty and little direction with business owners and households preferring to replenish the coffers for those “rainy” days or to pay the additional costs we’re all now facing.
Given the state of the economy and uncertainty surrounding the future, especially in anticipation of a general election, many business owners have expressed great interest in moving overseas, the main reason for this being a desire to escape UK CGT.
You will have heard this many times, but I recently had a meeting with a potential client who had invested numerous hours, money, sweat and tears to keep his business running over many years, to ensure the 200+ staff remain employed while he’s had periods where he’s gone unpaid. One point that resonates with most OMBs was when he concluded that if he clocked up the number of hours he put into the business vs the value of his remuneration, he suspects he would be underpaid.
OMBs undoubtedly make sacrifices to run a business, so a key consideration for these taxpayers is that the tax paid on a sale should be at a realistic level as a reward and “payback” for keeping the business running over many years, meaning OMBs should be able to enjoy the fruits of their labour without dreading a hefty tax bill. But with the curtailment of Business Asset Disposal Relief and the exposure to inheritance tax at 40% on cash realised from the sale of a business, the heavy tax burden is certainly driving behaviour in this group. This is my point.
In the autumn statement, the OBR expected the economy to grow by 0.7% in 2024 and 1.25% in 2025, and the government’s key areas of focus were cutting taxes, rewarding hard work, reducing debt and backing business.
Given the battering Rishi Sunak has taken in recent by-elections, I’m certain there will be some measured tax cuts to try and win back some of the electorate. This needs to be more than the meagre NIC cuts announced in November. I suspect it may involve extending the tax bands to deal with fiscal drag, maybe a reduction in income tax rates (although I’m less confident here) and possibly abolishing IHT – although I suspect it will remain in some form given its crucial role in reducing wealth inequality.
And what about CGT? Who knows! With economic growth stagnating, the government must surely at least maintain the status quo to ensure our OMBs are not going overseas to manage their tax affairs and leave the UK tax net. It’s abundantly clear to me that more should be done to incentivise OMBs to stay in the UK, to keep their knowledge and wealth invested in the UK. Tax does drive behaviour and tax policy should be focussed on a fair system to reward those who “work hard” and for business owners to pay a sensible level of capital gains tax and IHT when they finally realise their investment from years of hard work and sacrifice.
We witnessed how delicate the economy/market is given the fallout from Truss and Kwarteng. If the Spring Budget doesn’t quite hit the right note (say for example, CGT is increased or say BADR is abolished) coupled with the uncertainty a change in government brings, I suspect there will be a cohort of OMBs wanting to live abroad to manage their tax affairs. It’s certainly a lot easier to stay connected with friends and family in the post-Covid era!
The government (existing or new) must not forget about the backbone of our economy i.e. the OMBs, otherwise, there is real danger of losing these people to lower tax jurisdictions. As the lyrics to the Beatles song go: “you’re working for no one but me (taxman)”, but no one wants to work for the taxman! Whilst the state of the economy is still on the edge of a precipice, it is critical that the Chancellor gets it right this Spring.
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20 February 2024
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