The Lib Dems want to strike at a 'series of distortions, loopholes and excess reliefs' – landing SMEs, investors and shareholders with significantly higher tax bills, say Hugo Smith and Guy Broadfield
After holding the balance of power in the 2010 election, Nick Clegg has, in launching his party's manifesto, boldly asserted that the Liberal Democrats may again become 'kingmakers' on 7 May and announced that a Lib Dem government would 'ensure those on the highest incomes make a fair contribution' to society. Two of their key manifesto pledges are likely to have a major impact on small and medium sized business owners (SMEs), as well as ordinary investors.
The Lib Dems are proposing to increase the rate of tax on dividends for higher rate and additional tax payers by 5 per cent, up to a top rate of 47.5 per cent. The proposal will affect more than a million shareholders and raise an additional ’1.2 billion each year.
While not only being an increased tax on investment income (an apparent return to the investment income surcharge of the 1970s), the apparent aim of the policy is to reduce the tax saving available to business owners who pay themselves through dividends rather than by way of salary. This would limit a significant advantage for smaller, owner managed businesses. It would also discourage the creation of family investment companies.
This possible rise in income tax is matched by a reduction in capital gains tax reliefs. Possibly most concerning for business owners is a proposal to scale back entrepreneurs' relief, which allows business owners on exit to pay capital gains tax at a rate of only 10 per cent (rather than 28 per cent) on profits of up to ’10 million. This is one of the most valuable reliefs for SMEs, and has increased significantly in recent years.
Finally, it is reported that a Lib Dem government would also attempt to raise ’700 million more each year by reducing the capital gains tax annual exemption from ’11,100 to ’2,500, impacting not just SMEs but all investors and shareholders who will face higher capital gains tax bills.
The Lib Dems view these rules as a 'series of distortions, loopholes and excess reliefs that should be removed', but in reality they have been valuable tax reliefs for owners of SMEs. These manifesto pledges come at a point when SMEs have weathered difficult economic times and with the upturn in the economy owners may now wish to exit, but could now be faced with significantly higher tax bills.
Given these proposals are designed to fund the Lib Dem promise to increase the personal allowance to ’12,500 by 2020 (a key manifesto commitment), such tax changes will be likely if the Lib Dems are to return – in one form or another – to Number 10.
Hugo Smith is a partner and Guy Broadfield is a solicitor in the private wealth department at Bircham Dyson Bell