Difficulty securing entrepreneur's relief could lead to more taxpayers entering into avoidance schemes
HMRC collected £124 million last year from investigations into SMEs and 'wealthy individuals' suspected of avoiding Capital Gains Tax, says law firm Collyer Bristow.
Capital Gains Tax (CGT) is paid to the Revenue on the profits of assets sold, such as shares, second homes or the sale of stakes in businesses.
However, Collyer Bristow says that changes to some reliefs mean many entrepreneurs and 'wealthy individuals' are facing increased tax bills, with a risk that some may go too far in reducing their bills through avoidance schemes.
For example, due to restrictions on eligibility made in the 2015 Budget, it has become increasingly difficult for business owners, of SMEs in particular, to claim Entrepreneur's Relief. Entrepreneurs' Relief reduces an individual's Capital Gains Tax rate from 20% to 10% on sales of all or part of their business.
HMRC projects that only £2 billion of Entrepreneurs' Relief will be successfully claimed against Capital Gains Tax bills in 2016/17*, down from £3.5 billion in each of the two previous years.
Collyer Bristow warns that HMRC has made it clear that it is prepared to crack down on those purposely reducing their CGT bills – penalties could include hefty fines or even jail time. For example, a landlord from Hampshire was recently jailed for over two years, for evading £157,725 in Capital Gains Tax after failing to declare sales of properties.
James Badcock, Partner at Collyer Bristow, comments:
"Capital Gains Tax is becoming a major issue for investors and business owners, which could lead some to seek relief from increased taxation through avoidance schemes."
"In the past, CGT avoidance schemes have included creating artificial capital losses which can be used to offset the tax, whilst others might use offshore trusts and structures to make use of loopholes."
"However, some will simply fail to declare the sale or transfer of an asset, or undervalue it when reporting to HMRC."
"There are legitimate ways of avoiding CGT which are not viewed as abusive. Some individuals may decide to become non-UK resident prior to disposing of their business interest. Others may invest the proceeds in tax approved investments such as through the Enterprise Investment Scheme by which CGT is not paid until the new investment is sold."
"Those wishing to mitigate CGT on the disposal of assets should seek advice and ensure that they do not cross the line into what could constitute abusive avoidance or evasion."
*Source: Moore Stephens