“I want Britain to be the best place to start and grow a business, so we can make all parts of our country better off,” Rachel Reeves said recently on X/Twitter.
However, will it be the best place to exit a business? Few indicators look promising.
Rumours of substantive changes to Capital Gains Tax (CGT) rules have been floating around for a while, and have further intensified since Reeves’ rhetoric about “painful” and “tough” decisions ahead.
One thing is for certain: the government has boxed itself in by ruling out increases in income tax, National Insurance, VAT or corporation tax, which comprise just shy of 75 percent of all tax revenues.
What tax changes, then, might we expect to see in the Autumn Budget on 30th October?
Tax changes we may see
Hikes to capital gains tax (CGT)
Pre-election, Keir Starmer refused to rule out any increases to CGT, and Rachel Reeves has been similarly coy. No doubt it will be a key weapon in the tax-raising arsenal.
Indeed, the tax is a “nice little earner” for governments everywhere: the 2022/23 tax year saw the UK coffers swell by £16.9bn, thanks to this particularly profitable levy.
What changes, however, could be made?
The current CGT rate for shares, ignoring any reliefs, is 20%. This puts the UK in the middle ground globally – lower than high-tax countries like Australia (45%) and Denmark (40%), but still significantly higher than places like Belgium, Switzerland, and New Zealand, which have 0% CGT.
Our 20% CGT rate also looks pretty modest next to the maximum dividend tax (39.35%) and the higher-rate income tax (45%, not counting National Insurance).
“Greater alignment” with income tax was the recommendation of the Office of Tax Simplifcation (OTS) in 2020. They said that this would “create a more neutral tax system”, as well as “reduce the need for complex rules to police the boundary between income and gains”.
However, if the powers that be decide to align CGT with these rates, businesses would face significantly higher tax bills upon selling.
If CGT rates are increased in the future, the changes could potentially take effect immediately on October 30, 2024. This would prevent business owners from rushing to sell their assets before the 2025/26 tax year.
Scrapping of Business Asset Disposal Relief (BADR)
The Business Asset Disposal Relief (BADR), previously tagged as “the UK’s worst tax break”, also seems to be on shaky ground – even if CGT rates remain the same.
BADR has already been substantially diluted over recent years so that it currently only applies to the first £1m of lifetime capital gains. Initially the amount of gains covered by BADR was unlimited, and for a period it was reduced to £10m.
It has also been widely criticised by the likes of the Resolution Foundation, which said in 2018 that the tax was “expensive, ineffective, and regressive”, and by Sir Edward Troup, a former permanent secretary at HMRC and a key figure in the panel of experts put together by Labour to help advise on modernising the tax authority.
The claim is that the tax break has no effect on encouraging entrepreneurial behaviour. “The point of Entrepreneurs’ Relief is that it rewards you when you make a lot of money,” Troup said in 2019. “There are lots of things getting in the way of people becoming great entrepreneurs in this country, but the fear of tax on future gains is not one of them.”
In its 2020 CGT review report, the OTS also said that if BADR’s purpose is to stimulate business investment and risk-taking, it is “mistargeted”.
In other words, there is a lot stacked against BADR.
Where should you go from here if you’re looking to sell?
Plough on anyway
Life rarely aligns neatly with the whims of government policy. If the time is ripe to sell your business (i.e. you’re seeing consistent growth, strong profitability and a stable market position), it’s wise to move forward regardless.
That is, we’d recommend looking at the question of timing through a wide-angle lens, taking into account personal motivations and the business’ financial trajectory, as well as wider industry and macroeconomics conditions.
Bringing in a broker like ourselves from the outset can help protect and maximise your business’s value, no matter how the policy landscape shifts.
Disposal into an Employee Ownership Trust (EOT)
Shareholders may want to consider selling a majority or all of their shares to an Employee Ownership Trust. This is a statutory trust that lets shareholders sell their shares at full market value while claiming 100% CGT relief.
Since EOTs are meant to encourage employee ownership, it’s likely that their favourable tax treatment will be less targeted for changes in the upcoming budget.
Again, our team at Hilton Smythe can assess whether an EOT is the right fit for your business. We’ll provide a clear and accurate valuation, connect you with the right legal support, ensure everyone is on the same page, and guide you through the details of funding and tax structuring.