The chancellor has signalled a willingness to reform the tax system – he might want to consider capital gains tax as a start, says Kate Aitchison.
Capital taxes are complex, and there is inconsistency in the way they apply to businesses, leaving some businesses liable to pay them when others are not.
Last week (March 23) chancellor Rishi Sunak delivered his Spring Statement against a backdrop of rising living costs, high taxes, and rapidly rising inflation.
The government announced a future cut to basic income tax, and raised the threshold for national insurance payments to £12,570, same as income tax. It also outlined plans to reform the "over 1,000 tax reliefs and allowances in the tax system" to make the tax system "simpler, fairer and more efficient".
Kate Aitchison, private client tax director at RSM UK, tells FTAdviser why now is the time to reform capital taxes and what advisers should be aware of when it comes to passing on their business.
FTA: What is your overall assessment of the Spring Statement?
KA: Perhaps the scale of the tax announcements was a bit more than I was expecting.
I think a few people had wondered whether something more might have happened around VAT. It was certainly looking like that in a speech about a month ago [outlining plans for] capital, people and ideas. It felt very much that that was going to be the strategy and the agenda going forward. Looking at trying to grow entrepreneurship, looking at the private sector, trying to build growth coming back into the economy.
FTA: The chancellor has said he wants to be a tax-cutting chancellor. Is he?
KA: I think he'd like to be, there's obviously some rate changes that have been announced. Certainly with the income tax changes that will be coming hopefully in a couple of years' time. I'm not sure on balanced he has been. There's the health and social care levy, and the corporation tax increase due to come in next year is quite a significant increase from 19 per cent.
TA: The government has shown a willingness to reform some of the tax reliefs in a tax plan published alongside the statement. Where should it start?
KA: There's been a lot of discussion in the run up to Budgets, and in the run up to the Spring Statement whether there will be anything more fundamental from a capital taxes perspective, whether rates will go up or whether the reliefs might change.
Things like inheritance tax and business property relief and the interaction with CGT reliefs, they're quite different structurally. You can have a business that will qualify for IHT relief but wouldn't qualify for CGT relief, and it just seems quite inconsistent that you can qualify for one but not the other.
The Office for Tax Simplification report last year suggested a number of changes to reliefs and changes to CGT generally, which I think was accepted across the board as being relatively sensible – there was nothing too controversial in that.
>You can have a business that will qualify for IHT relief but wouldn't qualify for CGT relief, and it just seems quite inconsistent that you can qualify for one but not the other.
Looking at things like entrepreneurs relief, which was scaled back quite considerably a couple of years ago, and renamed business asset disposal relief, that again, can be quite nuanced. It does make me wonder whether it's worth just reviewing the system in full and trying to simplify that.
You'd be surprised how many people don't utilise things like personal allowances, dividend allowances or personal savings; if you can maximise your tax-free allowances, you can actually create quite a meaningful income with no tax on that at all.
FTA: What tax issues have kept you busy?
KA: I deal a lot with the family business space. So looking at individuals that own businesses, and helping them to navigate the tax rules to a succession.
A lot of my clients have been thinking over the past few years about what they what they really want in life, and whether another 10 years slogging in the family business is what they really want, or whether they want to pass that to the kids and enjoy a fun retirement of travelling now that the borders are back open.
So certainly things around looking at passing shareholdings on to family.
FTA: In the advice space succession planning is a big thing. What should advisers know about?
KA: Depending on the size of portfolio it is certainly worth still considering whether you qualify for business asset disposal relief. Depending on how sales are structured, you can still qualify. So that's a 10 per cent rate on your sale proceeds rather than 20 per cent.
There are a whole raft of qualifying criteria. So as long as you've had the business for at least two years, it depends how the business is structured, whether it's in shares, or whether it's a sole trader business, the rules are slightly different. But that can be reasonably meaningful. So it's the first £1mn worth of gain that you would pay 10 per cent on.
>A lot of my clients have been thinking over the past few years about what they what they really want in life, and whether another 10 years slogging in the family business is what they really want
And the other thing that's been quite a difficult conversation to have with people is the tax-free uplift you get on death. So when you pass away, and you've got a qualifying business, like you would have as an adviser, you might pay IHT on it, or you might get relief on it. And what you also get is a tax-free uplift to market value for CGT purposes.
So for a lot of people, they will just hold on to the family business until they die, get relief from IHT, and they can pass that on essentially tax free because the children will inherit with no CGT base cost.
What I've been trying to encourage clients to look at is some more lifetime planning. So rather than waiting for people that are living a little bit longer, look at doing something different to pass those assets on now so that the kids can run the business still in their lifetime, and they can take a step back.
FTA: If there's one thing every adviser should do...?
KA: Get a will. People just assume things go to their surviving spouse and that's not necessarily what the rules say. And make sure you've got powers of attorney in place. I've seen scenarios where parents have done their inheritance planning and have got a really efficient estate and the child has died and everything has flown back up to the parents' estate, in one fell sweep it's all sort of undone.
It's definitely one to keep on the radar and keep up to date.
carmen.reichman@ft.com
