There has been much discussion about changes to the capital gains tax rules, and the words “private equity” keep being mentioned. However, the proposals did originally catch entrepreneurs and small businesses, and so after much protest, an entrepreneurs’ relief has been announced.

Capital gains tax

When does capital gains tax crop up anyway? Capital gains tax is paid by companies and individuals, when they sell all sorts of stuff. Often, things you sell are sold as part of your trade, and so the profits are taxed either through income tax or corporation tax. But if you sell something that isn’t a product, for example, a building in which you have operated, or your shares in your company, then capital gains tax becomes relevant instead.

For individuals, the highest rate of capital gains tax is 40% (like income tax) but various reliefs are available to reduce this. Most notably, something known as taper relief can sometimes reduce this rate to effectively 10%.

Why have the new rules been proposed?

The government have proposed changes to the rules on capital gains tax, in part at least, because organisations (sometimes referred to as “private equity firms”) which had invested in private companies, might only have to pay tax at 10%, and some people have been getting rich doing so. And wherever anyone makes some money, there’s usually an allegation that they are not being taxed enough.

The result is that the proposed changes abandon almost all these reliefs. Instead, the rate of 18% will apply to all profits when capital items are sold. This isn’t law yet, and not all the details have been given, but given the implications for small business owners, many business groups, and accounting bodies made representations in complaint.

Good news

In response, an “entrepreneurs’ relief” has been proposed. Again, this is not yet law, and so all the details are not yet known, but the aim is to allow up to £1 million of business gains in an individual’s lifetime to qualify for the 10% rate.

Will I benefit or lose out then?

From what we know so far, there will be positives and negatives. For example, if people own buy-to-let properties, gains will now be taxed at 18%, rather than a rate which could be high as 40% (although indexation, a relief available on some properties held for a long time, will still be abolished). However, where previously you might have sold your company and might have only paid tax at 10% on your gain, under these proposals you’ll pay 18%, but possibly only on gains above £1 million. So in the short term, for small gains, these rules might have no real effect on you. If your business activities grow, and in time, the £1 million limit is not increased with inflation, then these rules could become relevant.

It is unlikely that we’ve heard the last of this issue…

As with all our information in The Business Lounge, this is not comprehensive tax advice and may not apply to your specific circumstances: to discuss how this affects you, contact your accountant.