Capital Gains Tax (CGT)
We had cautiously hoped that Capital Gains Tax (CGT) for sellers of businesses would remain untouched following the recent adjustments that significantly reduced Capital Gain Tax annual personal allowances. However, Labour is now advocating an increase in Capital Gains Tax to 45%, specifically targeting private equity executives with the objective to close perceived loopholes in the current system. This push has gained momentum, with the Shadow Chancellor, Rachel Reeves, reaffirming the party’s commitment to the proposal.
Labour’s rationale stems from concerns regarding preferential treatment for private equity groups who, they argue, benefit from tax breaks whilst engaging in what they term “asset stripping” of national assets. Despite internal discussions to potentially moderate the policy and to address worries about deterring international investment, Labour remains resolute in its intention to close the loophole.
Recent revelations about Prime Minister, Rishi Sunak’s tax affairs, reportedly indicating a lower tax rate despite significant capital gains income, have unfortunately further bolstered Labour’s argument. They aim to capitalise on this tax rate disparity to enhance their case for Capital Gains Tax reform, highlighting the necessity for a fairer tax system that bridges the gaps between wealth-derived income and employment earnings.
Private equity the target
Despite discussions within the Labour Party to soften the policy and address worries about deterring international investment, this month’s announcements indicate that Reeves and her team remain resolute, focusing primarily on private equity.
Private Equity firms currently hold an estimated £1.9 trillion in reserves and the prospect of increased taxes upon exit will most likely compel them to consider these additional costs when acquiring companies, which could potentially result in an erosion of private company valuations. However, any decline in valuations might be offset by forecast interest rate reductions with the cost of debt expected to reduce, which could stimulate activity. Nonetheless, the persistently limited supply of quality company assets for sale continues to constrain the market and reinforce valuations, with most company sales that Avondale advises going to auction after multiple bids.
Solutions
There is a hope that exemptions, such as Business Asset Disposal Relief (BADR) and the 0% rate on employee ownership will continue to incentivise entrepreneurs and aid business owners whose company value serves as their pension after years of dedication. Nonetheless, broad changes seem imminent should Labour, as indicated by polls, secure election victory. Those considering a sale may be wise to act promptly.
Please call Avondale on +44 (0)20 7788 8250 or email us at av@avondale.co.uk if you would like to speak to one of our advisors.
