UK business owners rush to sell

There has been marked increase in the sales of businesses, coming into 2021. According to the corporate advisory community, this spike is largely due to older-generation business owners rushing to sell their businesses, ahead of possible tax changes that could cost them hundreds of thousands of pounds.

Rishi Sunak, the Chancellor of the Exchequer, is thought to be putting the final touches on key tax reforms, which are likely to be announced in the Spring Budget on 3 March 2021. New rules could be in place by 6 April, the first day of the 2021-22 tax year – or possibly even sooner.

Given the desperate state of the UK's public finances post Covid-19, it is widely expected that Capital Gains Tax (CGT) rates will be increased and the much cherished Entrepreneurs Relief would be abolished.

Capital Gains Tax (CGT) increase

It is feared that CGT rates could be aligned much more closely with the income tax system. Currently, most taxpayers pay CGT at a rate of 20%, falling to 10% for basic-rate taxpayers. By contrast, higher- and additional-rate taxpayers pay 40% and 45% respectively on their incomes. Increasing CGT accordingly – and perhaps introducing a new additional rate – would provide the Treasury with a handy windfall.

Abolition of Entrepreneurs Relief

Currently, Entrepreneurs Relief entitles business owners (and investors in certain circumstances) to a reduced CGT rate of 10% on the first £1m of capital gains they make when selling a business. The Chancellor had already established precedence in the prior year, by cutting the maximum gain on which Entrepreneurs Relief may be claimed from £10m (these are lifetime limits, not allowances for each business sale). Now he may be about to get rid of the relief altogether, or to implement very limited qualifying criteria; one suggestion is that entrepreneurs would only be able to use the relief when selling a business in order to retire.

Tip: Maximising ER

One thing to bear in mind to maximise your entrepreneurs’ relief is that the £1 million limit is per individual. Additionally, Capital Gains Tax does not apply on gifts if these gifts are donated to spouses.

Therefore, if you are in danger of exceeding your ER allowance, it is worth considering transferring assets to your spouse in order to transfer the gain from one party to another. Providing they meet the qualifying conditions, they will now be eligible for ER if they are yet to reach their allowance. This enables you to maximise your relief! Just be sure to make sure that the gift is unconditional in order to qualify.

The combined effect of these two reforms would be costly for many entrepreneurs.

To illustrate, an additional-rate income taxpayer who sells their business today for £5m, would have to pay £900,000 of CGT, taking into account the effect of Entrepreneurs Relief and a 20% CGT rate above the £1m threshold. If, however, the sale took place after the abolition of the relief and an alignment between CGT and income tax rates, the tax bill would rise to £2.25m.

The prospect of such a tax hike has prompted many anxious business owners who are closer to retirement, to consult their accountants and tax financial advisers.

What makes this a difficult decision is that the current market environment in many sectors of the economy, is hardly ideal for securing the greatest possible value from a sale, unless a one is flexible on terms. Depending on the size, perhaps selling part of one's shareholding now to the right buyer is another option to consider - maximizing the tax benefit now, whilst optimising growth of remaining shareholding going forward.

Should you wish to have an exploratory discussion with Excelerate Co, a prospective buyer/partner, contact us on info@excelerateco.com.