The impact of Capital Gains Tax rates on business sale timings
The sale of a company is often the ultimate goal for an entrepreneur. Cash in the bank and freedom of time – however, with your business generating a good yield and alternative investments being volatile, many business owners understandably choose to stay and enjoy the income their business generates rather than ‘cashing in’. This approach ignores the real threat that Capital Gains Tax (CGT) rates on the sale of shares may present.
The UK Government is currently facing significant budget deficits as a result of the COVID-19 pandemic with calls to increase taxes to raise revenue. The Office for Budget Responsibility (OBR) has projected that the UK’s budget deficit for the financial year 2022-23 will reach £60 billion, a significant increase from the £10 billion deficit in 2021. The Government needs to raise money, but the Capital Gains Tax (“CGT”) rate is significantly less than income tax and, if you sell 51% or more of your shares to an employee ownership trust (“EOT”) there is 0% CGT tax. Otherwise, the rate is 20% on the sale of shares reduced by Business Asset Relief to 10% on the first million (a lifetime allowance) per executive shareholder who has held shares for more than 2 years.
The aim of Business Asset Relief is to encourage entrepreneurship and incentivise business owners to invest in and grow their businesses. It does this by reducing the amount of CGT that an individual must pay when they dispose of qualifying business assets. The relief was introduced in 2008 as a successor to the Business Asset Taper Relief, which was seen as overly complex and was criticised for its lack of transparency. The relief is available to eligible individuals who dispose of certain types of business assets, including shares, securities, and land or buildings used in their business.
A change of Government is due by January 2025. Both the 10% relief and even the 20% CGT on the sale of shares are highly generous compared to income tax rates at 40% there is a high risk that a new Labour government will increase these rates which will have a huge impact on and reduce many owners’ retirement pots. The potential increase in CGT on M&A sales is a concern for businesses and investors, given the significant impact it could have on the UK’s economy.
Should I stay or Should I go?
“Should I Stay, or Should I go” was written by The Clash. One of the lines says “I’ll be here ’til the end of time” – but from a business ownership perspective, this is not correct as we will all, inevitably, exit our business at some point. The question is when and how? Many miss the opportunity to capitalise at the right time because they enjoy the work and whilst every seller Avondale has represented has generally found a sale a big change, the majority have happily moved onto new pastures. With tax hikes so heavily on the radar if a sale and capitalisation is an option it may pay to review your options earlier. Buyers remain highly active with organic growth slow; acquisition and consolidation change business models quickly and bring critical economies of scale and synergy.
Contact Avondale Corporate
So, should you stay, or should you go? Avondale would welcome the opportunity to discuss your exit options with you and help you plan for your future. Please call us at +44 (0)1737 240888, our Contact Us page or email av@avondale.co.uk to make an appointment. You can also visit our website at www.avondale.co.uk to learn more about our services.
