One in Three Business Owners Are Accelerating Sales as Capital Gains Raid Looms

Business owners are submitting their exit strategies in anticipation of the Government carrying out a capital gains raid in the Budget.

A survey by wealth manager Evelyn Partners found that 29 percent of entrepreneurs have accelerated their exit plans, up from 23 percent 18 months ago.

The Government has ruled out raising the corporate headline rate above 25 per cent and has committed to freezing general income tax, national insurance and VAT rates.

However, the Prime Minister warned that the October 30 budget will be “painful” and remains cagey about any changes to capital gains tax (CGT) or inheritance tax (IHT) relief.

Currently, CGT rates are significantly lower than income tax rates, with basic rate taxpayers paying 10 per cent on most profits and 18 per cent on residential property.

There has been speculation that Rachel Reeves could try to match CGT with income tax rates, which could see some people charged as much as 45 per cent in tax on their earnings.

You may also consider Disposal of Business Assets Relief, formerly Entrepreneurs’ Relief, which allows business owners to pay a reduced CGT rate on profits of up to £1 million.

As a result, business owners are taking matters into their own hands and rushing to sell ahead of any anticipated changes to avoid paying higher taxes.

Almost a quarter of respondents with sales over £5m have accelerated their plans due to capital gains tax (CGT) concerns.

A further 20 per cent have submitted plans over the past 12 months in anticipation of possible cuts to inheritance tax relief.

Laura Hayward, tax partner at Evelyn Partners, said: “As opinion polls increasingly suggested a change of government and the consequent potential for tax changes became more likely, an increasing number of business owners have contacted us to talk about the exit of companies”. .’

David Goodfellow, head of financial planning at Cannacord Genuity in the UK, told This is Money that he had had more clients asking about CGT for both commercial and property transactions. Others were “sitting on their hands.”

‘I suspect what we are seeing are those clients who have made a decision or are about to make a decision about looking for a buyer… they have accelerated it.

‘We all know that the schedule involved in any of those decisions has less control. You have to find a buyer and generally there is a fair bit of administration, legal work and negotiations to do.

‘Whilst I am not making a prediction that there will be a change, I think it is fairly certain that CGT will not be lower, so why not continue with a transaction and hopefully the same level of CGT?’

He also warned that any “punitive” tax would have an effect on the broader business landscape, as more people are discouraged from selling or taking risks.

“Reducing those attractive tax breaks that business owners have seen in the past, or even raising taxes on people who have taken risks, will be discouraging.”

There are other factors at play beyond the looming budget. A quarter of entrepreneurs claim to have brought forward their exit to access the capital tied up in their business.

Another 24 percent said they were looking to sell as the cost of accessing capital has increased as a result of rising interest rates.

Hayward said: ‘The business environment for many landlords has been difficult enough in recent years as they have worked hard to rebuild their businesses post-pandemic, against a backdrop of cost of living pressures and high inflation.

“Add to that the possibility of unfavorable tax changes in the upcoming budget, and it’s completely understandable that some would hope to build on their successes sooner rather than later.”

While some business owners might be reconsidering their exit strategy to avoid higher taxes, this comes with some risk.

Any selling driven by tax concerns will likely see some of the shine fade from the sale, leading to a weakening in price.

Goodfellow says, “To be clear, if a client asks me if I think I should sell my business because taxes are going up, my answer about stocks is no.” Because you don’t know that taxes are going to go up.

‘You should not take any action based on speculation about what may or may not happen in the future. That’s always the wrong reason.