Selling a business can be a daunting process, and tax is just one of the many factors to consider.
For many years business owners have come to expect to benefit from the very benign Capital Taxes regime, not least due to Entrepreneurs’ Relief (ER) which can effectively reduce the tax paid on gains from 20% to 10%, securing a very significant CGT saving.
However, ER has repeatedly come under scrutiny in recent years, with pressure mounting to abolish it entirely. Statistics released by HMRC reveal that 9,000 people paid £5.1bn in tax on £33.7bn of capital gains in the 2017/18 financial year. Whilst this is a considerable sum, the average tax rate is calculated at just 15% – much lower than the 20% basic rate income tax, and fraction of the 40% higher rate income tax.
This discrepancy in the rates of capital and income tax rates has long been questioned, but the stakes have recently soared due to comments made by Sir Edward Troup, a former executive chair of HMRC, who suggested that a large number of the country’s richest are exploiting ER to pay just a paltry 10% tax. He went on to recommend the abolition of ER, saying that “it gave away £2bn every year to those that have already made their gains and provides no incentive for real entrepreneurship”.
In recent months the government has already restricted the availability of ER for business owners by introducing qualifying conditions during the two years prior to the sale of the business – to prevent misuse of this incredibly valuable relief. However, with the general election just weeks away, there are new and louder calls for any new government to axe it entirely.
If I’m considering selling my business, what should I do?
If ER is scrapped entirely, we can hope that it won’t be removed overnight, providing business owners a little time to plan.
Given the mounting pressure facing ER, business owners would be sensible to start careful planning, and such considerations may mean bringing forward the exit process so as to benefit from ER. Its loss will mean tax on the gain realised upon sale could double from 10% to 20%, seriously affecting the vast majority of business owners’ expectations of value and the quality of retirement.
A multifaceted approach to selling a business
The sale of a business is often complex and involves many intertwined factors. Adequately preparing a business for sale and seeking advice well ahead of the process will ensure you have some time to plan, in turn securing optimal value for your business.
Smith Cooper Corporate Finance are one of the Midlands top 10 corporate finance advisors, specialising in the sale of companies. By utilising experts across our award-winning service lines, you can be assured that the advice that you receive is not only commercially astute and commercially viable, but all-encompassing and aligned with your objectives.
If you are considering selling your business or have plans to accelerate a sales process, please get in touch ; we would be delighted to assist.