How do the changes to capital gains tax affect your company?

The short answer is that they have no effect at all because companies don’t pay capital gains tax! Companies pay corporation tax on their capital gains. Am I stating the obvious? The owner of a manufacturing business rang me the other day and he was frantic about how the changes would affect his company – so not everyone will think it is an obvious statement.

The bones of the changes are that the rate of tax for higher rate taxpayers has gone up from 18% to 28%. For business owners Entrepreneurs Relief now means that lifetime gains of up to £5m are taxed at 10%, whereas previously this was £2m at 10%.

A higher rate taxpayer may still think that 28% is attractive but you need to remember that you may have owned the asset for some time and hence you are effectively being taxed on inflation. For example if you bought a property in 1990 and its value only kept pace with inflation then you are not actually any better off now, but you will be taxed on the sale on effectively the inflation amount. This doesn’t really seem fair.

For the manufacturing entrepreneur who owns the shares of the company, the (potential) good news in the budget is the extension of Entrepreneurs Relief. So, how does it work now compared to before?

Let us say that ‘A’ and ‘B’ are selling their respective successful manufacturing companies for £4million and £20million.

Before: ‘A’ would pay about £560,000 in capital gains tax (an effective rate of 14%)

After: ‘A’ would pay about £400,000 in capital gains tax (an effective rate of 10%)

Nice.

Before: ‘B’ would pay about £3.44m in capital gains tax (an effective rate of 17%)

After: ‘B’ would pay about £4.7m in capital gains tax (an effective rate of 23.5%)

Not so nice.

If you sell the shares in your trading company for £5m or less, then the rate of 10% is very attractive.

If your company sells its business and assets (as distinct from you selling the shares) then the company pays corporation tax on the gain and you pay further tax when you get the money out of the company! So make sure that any future sale is done correctly.