Planning on selling your business in the next few years? You might have to pay more tax on the proceeds than expected. The new government could very well decide capital gains tax (CGT) is a good way to raise revenues, given those commitments not to increase income tax, national insurance or VAT.
This isn’t a party-political point. Yes, Labour has consistently refused to rule out changes to the CGT system. But the last government review of the CGT rules was ordered as recently as 2020 by the then chancellor – one Rishi Sunak. Eventually, ministers backed away from reforms, not least because the priority was to deal with Covid, but the review was a warning shot.
There’s no denying that business owners get a generous break from the current CGT regime. When most people sell assets, the standard rate of CGT, 20%, is payable on any profit they make over and above their annual capital gains allowance, which was reduced to just £3,000 at the beginning of the current tax year. By contrast, most sellers of privately owned businesses qualify for business asset-disposal relief – or entrepreneurs’ relief, as it was known until recently.
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This tax break allows business owners to pay only 10% CGT on their first £1 million of profits when selling their enterprises. Assuming their company delivers a return worth more than £1 million, business asset disposal relief gives them a windfall worth the best part of £100,000.
Future government moves to dump this relief would, therefore, be costly. And if they were to be combined with an increase in the CGT rate, the pain would be even greater. The 20% CGT rate payable on gains from most asset sales looks modest compared to the higher and additional rates of income tax – 40% and 45% respectively – so a hike is certainly possible. At the extreme, assuming CGT rates were matched to income tax rates, someone selling a business at a profit of more than £1 million might face a bill that is almost £350,000 higher than it would be today.
Disposals to family members could also fall foul of CGT reforms. Today, if you sell your business for a price that does not fully reflect its market value – or give it away for nothing – your CGT calculation will be made as if you had received the full value of the asset.
The only way to avoid a nasty bill is to apply for holdover relief. This essentially passes on the CGT liability to the buyer of the business, who must pay any extra tax owed when they dispose of it. These arrangements are common where business owners are passing on a company to their children.
Holdover relief, however, isn’t set in stone. It could be restructured so that it becomes less generous, or even abolished altogether. That would pose quite a headache for many family-run companies.
Where does this leave business owners? The practical reality is that we simply don’t yet know if there will be CGT reforms, or what they might include. Trying to time the disposal of your business to avoid a hypothetical tax increase might backfire – particularly if your buyer exploits your need to sell.
Still, if you are thinking about selling a business over the next few years, it makes sense to take some professional advice sooner rather than later. There may be steps you can take to mitigate some of the future risk.
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