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Print articleUnder Provisions Contained in the Finance Act 2009, the Highest Rate of Income Tax Will Increase from 40% to 50% With Effect From 6 April 2010.
November, 2009 - Murphy Niall
At the same time, the effective rate of tax on dividends for high earners will rise from 25% to 36%. No changes are currently proposed to the rate of capital gains tax which means it will remain at 18%.
However, both main parties have now admitted that further tax increases are likely. With the gap between income tax and capital gains being a massive 32%, it seems unlikely that the current generous rate of capital gains tax will remain in place.
Business owners effectively have the next six months to mitigate these increases. We set out below some suggestions.
Pay a dividend
If a company has available profits, significant savings are to be had by making large distributions to shareholders during the current tax year. Even if the company does not have ready cash this can be achieved by raising external finance and paying out a large dividend. This gives rise to a saving of 11% on the dividend, and the tax does not have to be paid until 31 January 2011.
Accelerated and partial sales
Owners thinking of selling their company should see whether it is possible to arrange a sale before 6 April 2010 and so lock into an 18% capital gains rate. Even if they cannot achieve a full sale it might be possible to arrange a partial exit.
In this case they could sell to a newly-formed company funded by bank debt, private equity and 'rolled over' value. This allows the owner to realise some value now and participate in future value growth.
However, HMRC scrutinises these transactions very carefully, and it is important to structure this properly to avoid income tax treatment.
A further possibility is that if an owner is confident of selling his company in the next 12 months, but not before 6 April, to sell the shares to a trust, thus triggering a disposal taxable at 18%. Such a strategy should be approached with caution.
Even if there is no increase in capital gains, we would expect any transaction that relies on exploiting the differential will be carefully scrutinised. This increases the risk that more value will be taxed at higher rates, so it makes sense, if possible, to lock into lower rates now.
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