Growthdeck, a private equity investment firm which offers investment opportunities in UK growth businesses to sophisticated and high net worth investors, discusses the UK’s latest capital gains tax bill and how to mitigate exposure to it.

The UK’s capital gains tax bill has reached record levels, with £15.3 billion ($18.3 billion) collected in the year to 31 October 2022, up 27 per cent from £12 billion in the previous twelve months, and highlighting how significant this tax now is, London-based Growthdeck said this week.

Ian Zant-Boer, CEO of Growthdeck, said that the dramatic increase in CGT bills in the UK has been partly driven by an increase in taxes imposed on the sale of businesses by entrepreneurs. 

In 2020, the government reduced the lifetime allowance of Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief) from £10 million to £1 million. This meant that entrepreneurs selling off business assets have incurred greater tax liabilities as a result of cuts to the relief, the firm said in a statement.

The data will add fuel to debate over whether the UK government's recent changes to tax rates - creating the highest tax burden for more than 70 years - are reaching the point where they are damaging economic growth and ultimately, reducing rather than increasing revenues sustainably. 

Growthdeck said the rise in CGT bills is also due in part to large numbers of buy-to-let investors selling off properties to capitalise on high property valuations as house prices soared at the end of the Covid pandemic.

In the UK, capital gains tax is payable when people sell or gift certain items worth more than £6,000 such as antiques or art, or assets including second homes and shares held outside of an ISA or PEP.

“The UK is paying more CGT than ever. Unfortunately, entrepreneurs will have accounted for a significant proportion of the increase in those bills," Zant-Boer, CEO of Growthdeck, said. “It is argued that having low CGT bills on the sale of businesses by entrepreneurs rewards them for having taken a high degree of personal risk to benefit the economy by creating wealth and jobs."

Growthdeck’s research also reveals that out of 121 areas included in the study, residents in South-West London have incurred the largest CGT bills in the UK, reaching £1.3 billion in 2020/21. In second place is West London, with taxpayers paying £1 billion in CGT bills, and North-West London in third place, with £530 million. Inner London accounts for 24 per cent of all CGT paid across the UK over the last year, the firm added.

Zant-Boer said: “Individuals in these areas that have paid the highest CGT bills are most likely to need help managing their tax exposure if they have large investment portfolios.”

“One of the best ways to mitigate CGT exposure is to diversify assets into investment schemes like the Enterprise Investment Scheme,” he continued.

EIS
The Enterprise Investment Scheme is a venture capital scheme that offers tax breaks to individual investors who invest in EIS-qualifying companies. EIS tax reliefs include up to 30 per cent income tax relief, tax-free growth, and a “carry back” facility, which allows an investor to offset taxable gains from the previous year, the firm said.

EIS allows investors to not pay CGT on any gains realised after three years, and to defer capital gains tax due on the sale of another asset by re-investing the gain in an EIS-qualifying company. 

Zant-Boer said: “Not only does investing in EIS allow individuals to reduce their CGT bill, but it also offers the opportunity to support growing UK businesses. The opportunity to invest in innovative, fast-growing companies means many wealthy individuals see EIS investments as a core part of their investment portfolio.” 

Outlook   
The move comes after UK Chancellor of the Exchequer Jeremy Hunt released his Autumn Statement in November, setting out a reduction in the annual exempt allowance for capital gains tax from £12,300 to £6,000 from 6 April 2023 and then to £3,000 from the April 2024/25 tax year. 

Rebecca Fisher, partner in the private client team at Russell-Cooke, said at the time of the changes last year: “For trusts, the rate will be half the annual exemption – so £3,000 in 2023 and £1,500 in 2024.” 

“Overall, this means that more people will be paying more capital gains tax and, with it, potentially more compliance and reporting obligations,” she said. “In the Treasury’s policy costings the CGT allowance reduction estimates additional revenue of £275 million by 2024/25 rising to £440 million by 2027/28. What remains to be seen is the impact that these rates will have on behaviours,” she said. 

“The combination of a recession, a fall in the stock market and a possible stagnant property market may lead to very limited activity and disposals,” she continued.

“This reduction in the CGT rate means that the proposed changes to capital gains tax on divorce are all the more welcome. The Finance Bill 2023 extends the no gain/no loss treatment for divorcing couples. At present, any transfers have to be completed within the tax year of separation to get NG/NL treatment,” she said.  

“From 6 April 2023 this period is extended for an unlimited period of time if the transfer is in connection with a formal divorce agreement. Had the changes not been proposed then an even greater number of individuals would have been brought into the tax net as a result of family breakdown,” Fisher added.