Stagnant income tax thresholds over the last few years mean that more and more taxpayers are being pulled into the higher and additional rate bands of 40% and 45% respectively. By contrast, Capital Gains Tax (CGT) is currently charged at various rates depending on what's being sold, but the applicable rates are generally much lower, and can be as low as 10%.
So structuring a transaction to make sure the proceeds are treated as capital in your hands may be an attractive way for you to extract value from your company and to save tax.
Will the Capital Gains Tax (CGT) rates be changing under the new Labour government?
Interested investors should take note: this is an area ripe for
review by the new Government. The forthcoming Budget may well
include full or partial alignment of the tax treatment of capital
and income, as an easy and relatively uncontroversial way to boost
the UK's empty coffers.
But in the meantime, the good news is that if you sell shares in a
company for cash from that company, if the conditions are met you
will be charged CGT on any profit you make, rather than income tax.
This is in contrast to the rate you will pay if you receive
dividends or employment income from that company, or if the company
writes off a loan to you.
What are the conditions for me and the company?
The conditions are stringent and apply to both you personally and the company you're investing in. As a starting point, to qualify for capital treatment you, as the seller of the shares must pass a residence test, plus there are requirements relating to:
- How long you've held the shares,
- The proportion by which your interest in the company, and your right to receive the company's profits, are reduced by the buy-back, and
- Your remaining connections with the company after the transaction.
Note too that the interests of those connected with you, such as your husband or wife, are also taken into account when considering whether the conditions are met.
Unsurprisingly, there are also conditions for the company to meet. For example, your company must be unquoted on a stock exchange, and must be trading. There are also purpose related conditions, for example the company must be buying back the shares in order to benefit the company's trade.
What tax efficient alternatives are there to share buybacks?
If the conditions for capital treatment are not met, alternatives for extracting profit include the payment of dividends or salary, or the company could write off a loan it has made to you, although these will be taxable as income, typically at a higher rate.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
