Increase in tax cost of share sales and liquidations likely post 5 April 2021

In its 1st report published following its capital gains tax review that was released last month (see our blog post here), the Office for Tax Simplification (OTS) highlighted accumulated profits in companies on sale or liquidation as being an area of disparity between income tax and capital gains tax, and recommended that this was addressed.

This, along with other recommendations made in the report (e.g. aligning capital gains tax rates to income tax rates, abolishing ‘business asset disposal relief’ (albeit potential for replacement with something akin to the old ‘retirement relief’ etc) mean that tax liabilities realised on share sales and liquidations of limited companies post 5 April 2021 will likely be significantly higher than if carried out before.

Currently the tax cost can be as little as 10% on the proceeds/liquidation distributions where capital gains ‘business asset disposal relief’ (formerly entrepreneurs’ relief) applies.

If recommended changes are implemented, this rate could increase to as much as 45%, a huge increase in the tax cost.

Any shareholders considering an exit via sale or liquidation in the short term, and who are concerned by these recommendations, should be considering whether to move plans forward to achieve this in the current tax year, where possible.

Additionally, these recommendations will impact other clients in other situations that have an exposure to capital gains tax. We are currently proactively advising clients as to how to manage such tax changes, where the rumoured changes would have a significant impact. Please do not hesitate to contact us where you are concerned and require advice.