Selling soon? Keep tax in mind

The Chancellor’s statement yesterday highlighted a black hole in public finances. The Chancellor also reaffirmed Labour’s commitment not to raise income tax, NICs or VAT (beyond the addition of VAT to private school fees paid from yesterday in relation to the school term starting in January 2025).

Many may therefore be wondering where the cash is going to come from to fill this void, given that the three taxes that are not changing are the biggest generators of tax receipts.

An obvious choice to fill the black hole is an increase in capital gains tax (“CGT”). We are not the first to have this idea, and the internet is alive with theories, including bringing CGT rates up to match income tax rates – a dramatic change. Interestingly this was a measure that was introduced by a Conservative chancellor back in 1988 and which it has been said would raise an additional £14 billion.

We do not have anything new to add to this theory, but have not seen much discourse on what practical steps individuals can take if they are concerned CGT rates are going to rise. There are two obvious choices:

1. Don’t sell

This is obvious. Unlike employment income, generating capital gains is often not essential. This will likely be in the government’s mind when it considers if it should increase CGT, and by how much. Increase it too high, and disposals will drop off (and CGT revenue may, in turn, decrease).

The problem here is that there is no way of knowing how long CGT rates might stay high. It seems probable that any increase could remain in place for at least several years. After all, there may be public sympathy with the idea that capital gains should be taxed at the same rate as income, and there may be political pressure in the future not to reduce CGT rates.

2. Sell fast

This is also obvious, but CGT rates right now are reasonably generous, at 20% (assuming higher or additional rate taxpayers). There is a separate rate for residential property, which the Conservative government recently reduced from 28% to 24% (this article won’t touch on carried interest and private equity funds – the CGT rate is different there too). Of course, selling fast will inevitably require co-operation from the other side which may come at a price.

However, there is one slightly less obvious choice too however – “sell fast”, but understand that the date of disposal for CGT purposes is not what you might assume.

3. Exchange fast

CGT is triggered when a contract for sale is entered into, not when that contract later completes (subject to a point below on conditions). This is not widely known (and is not intuitive – after all, the sale doesn’t actually take place practically when contracts are exchanged). This might be critical to achieving a lower CGT rate though. If we assume the Chancellor increases CGT rates effective from the budget date (30 October), if that is after entering into a sale contract but before completion, you might be liable under the “old” rates if you have entered into a sale contract before 30 October but with completion taking place later.  It would be prudent here to flag that we do not know what detail will be attached to any change in CGT rates, but retrospective changes are unusual.

We say “might” for two reasons. Firstly, if a contract is contrived purely to benefit from lower tax rates, it will probably fail. Secondly, if a contract for sale is conditional, you only apply the “old” tax rates at the contract date if the conditions are the right sort of conditions (otherwise the date of disposal for CGT purposes is delayed to completion, or the date when the conditions are satisfied). This is a complicated area but the aim is to have an unconditional contract which is entered into before 30 October and which completes later.  This gives the parties time to sort out all the completion mechanics, funding and formalities, but crystallises the disposal date at the earlier contract date. Suitable contractual protections may be required with such a spilt exchange and completion and inevitably it requires the co-operation of the buyer too.

Looking closer at conditions, an unconditional agreement for sale would be best, but if conditions are critical (for example, a sale of real estate might be conditional on achieving planning permission), the relevant date for CGT purposes depends on whether the “condition” is a condition precedent or condition subsequent. Broadly, a condition precedent means a contract is only binding on the buyer and seller after the condition is satisfied. A condition subsequent is one which a binding contract requires a party to complete. Only conditions precedent delay the time of disposal for CGT purposes.

You may now be asking whether your fact pattern includes a “condition subsequent” or “condition precedent” (or if it is even conditional at all). Unfortunately, this is not always clear cut. Heads of terms between a buyer and seller almost certainly fail to trigger a disposal for CGT purposes. Caselaw found a contract to be unconditional where the completion date was fixed and the buyer had to seek planning (and could rescind the contract if planning was not obtained) however, and therefore did trigger CGT on the date of contract.

In summary – you have three months before the budget is given on 30 October 2024. We believe there is a good chance CGT rates will rise and, on that basis, if you are considering selling, or are in the process of selling, you need to act fast if you want to maximise your chances of paying CGT at the current rates. It would also be advisable to review past tax advice given in respect of transactions that have already completed but in respect of which payments may continue to be received after 30 October.

Further information

Please contact Matthew Spencer or someone in the Corporate and Commercial team if you would like to discuss anything mentioned above.

About the author

Matt is a partner within the Corporate, Commercial and Finance team, specialising in tax law, advising on and efficiently structuring a wide range of corporate and real estate transactions including M&A, land transfers, developments and leases.

Krishna Mahajan is an Associate in the Dispute Resolution Team, who specialises in litigation and resolution of complex tax matters.