Small businesses rush to beat the capital gains tax hike
Corporate finance advisers report a surge in inquiries from small business owners keen to sell their companies before a likely increase in capital gains tax (CGT) in the new year.
Chancellor Rishi Sunak is considering proposals for changes to CGT from the Office of Tax Simplification as he looks to raise funds in the wake of Covid-19. Small business owners could face the biggest hit. Sunak is widely expected to align CGT rates much more closely with the income-tax system. Where most taxpayers currently pay CGT at a rate of 20% – falling to 10% for basic-rate taxpayers – higher- and additional-rate taxpayers are charged 40% and 45% respectively on their incomes. Doubling CGT rates could bring in billions.
An additional worry for small business owners is the mooted abolition of Entrepreneurs’ Relief, under which founders pay CGT at only 10% when selling their companies. While the value of this relief was reduced in March, with entrepreneurs now subject to a lifetime limit of £1m of capital gains compared with £20m previously, abolishing it altogether would still cost some owners dearly.
The impact of the CGT changes could be considerable. An additional-rate income-taxpayer selling their business today for £5m would pay £900,000 of CGT, taking into account Entrepreneurs’ Relief and a 20% CGT rate. Abolishing the relief and aligning CGT and income-tax rates would see this bill rise to £2.25m.
Selling a company simply for tax reasons may not appeal to many entrepreneurs. However, for business owners who had already been mulling a sale, it may make sense to accelerate the process.