By Simon Marsden a Partner at Gambit Corporate Finance.
No business owner can have escaped the widespread political and media coverage regarding changes to the UK’s Capital Gains Tax (“CGT”) regime which it seems likely will be announced in the Budget on 30 October.
Given the hole in the UK’s public finances and a desire not to target “workers’ taxes”, changes to “wealth” taxes seem inevitable.
Whilst CGT is badged as a “rich person’s” tax with only around 369,000 people paying it in the UK, the rumoured changes could have significant consequences on business owners and their exit and realisation aspirations.
The devil will inevitably be in the detail when Chancellor Rachel Reeves delivers her inaugural Budget on 30 October but the direction of travel seems unequivocal. There are a number of variables to consider including:
- What will the headline rate increase to – expectations are a broad alignment with income tax rates
- What reliefs might there be to reduce this – potentially some form of “tapering” of gains based on the period of ownership of the shares
- Will any increase be in one tranche or staggered – will business owners have an extended period before rates peak
- When will any increase(s) take effect from – immediately or the end of the current or subsequent tax years
So, what is the advice to business owners in the two-month window until the full facts are known. In summary, it’s consider your options at the earliest opportunity, make a positive decision to do something (or not), rather than be passive and instigate a plan to execute your chosen strategy.
It’s about controlling the controllables. In the absence of knowing all the facts, the one element business owners can control is timeframes for decision making. For some business owners they, or the business, may not be ready to transfer ownership. For those who have already considered their options or are approaching that point this is a key decision influencer.
Business owners need to identify and evaluate the available options understanding the benefits, risks, practicalities and timing considerations. There is no “one size fits all” approach here – all business owners have their own objectives, priorities and nuances which need to be factored into the evaluation process.
Perhaps a simple example to illustrate what might be at stake is helpful. A shareholder selling their business for £5 million would currently pay £900,000 of CGT with the first £1 million of gain taxed at 10% and the remainder taxed at 20%.
Assuming the 10% threshold is removed the CGT payable increases to £1.5 million at a headline rate of 30% or £2 million if CGT rates are aligned with the higher rate of income tax (currently 40%).
So, the stakes are high for business owners.
Given the Government’s tactic of not showing its hand the M&A market is already witnessing that for companies in an exit process shareholders are rushing to try and get a deal concluded by the end of October to avoid any potential tax risk.
Most market commentators believe it likely that business owners will be afforded a “runway” to get their affairs in order and allow ownership to be transitioned prior to any changes taking effect. This presents a relatively short window for business owners to assess their options.
If the starting date for the changes announced is 6 April 2025 this will cause another wave of disposal activity increasing the tax take for the Treasury. However, thereafter M&A could drop off as owners extend tenure to grow valuations to achieve wealth planning objectives, so causing a downward reversal of CGT collections.
The smart thing for the Government to do is introduce a “taper relief” aligned to length of ownership to mitigate the higher rate and allow older businesses to follow natural succession timelines thereby enabling CGT generation in an orderly manner. This is a fairer approach to businesses that over time have contributed economic impact through corporate, employment and VAT tax contributions.
Another key consideration for the Government is not hastening UK citizens’ flight to tax havens which has been underway for some time and which extends beyond company owners to corporate traders, private equity and property investors looking to avoid CGT and Inheritance Tax, as well as contributing to a talent drain which compromises the wider economic growth agenda.
In terms of timeframes to mitigate risk, waiting to hear the details behind the Chancellor’s announcement on 30 October before initiating a process will be too late. If the objective is to execute a transaction by the end of the current tax year, based on average deal timeframes, that process needs to start by early October to provide headroom for any unforeseen delays.
There is nothing intrinsically wrong with shareholders playing the “waiting game”, holding onto and growing the business until its growth in profitability “absorbs” any tax increase. The key question to answer is do you have a robust and considered strategic plan for delivering the growth planned. Is this through organic growth, strategic acquisitions to access technological expertise, diversifying customer base, or achieving geographic expansion. Also key is assessing the funding and working capital requirements needed to deliver the growth plan.
An added complexity is predicting the state of the M&A market at any future point. Whilst there will always be appetite for high quality assets, the market is currently awash with cash from corporates, private equity and private debt funds all hungry for deals. We have all seen how unforeseen political and macroeconomic factors can rapidly transform the financial landscape, trading performance and prospects for businesses and how sensitive and fickle the market can be in choosing where to deploy its capital.
For many shareholders there will be a “bird in the hand” mentality to crystallise their positions with maximum certainty, particularly those still recovering from the scars of Covid and who have suffered from the recent macroeconomic factors which have inflicted significant headaches for many businesses and their owners.
So, in summary, act now to optimise your tax position, or delay and take your chance, the choice is yours.
