The date is drawing in: on Halloween eve, Rachel Reeves will deliver her first budget as chancellor.
For shareholders, none of the signs look promising. A few days ago, Keir Starmer hinted at tax rises for those who earn their income from shares and property, saying that they did not fit his definition of “working people”.
And landlords already appear to be selling up in record numbers, according to property website Rightmove, presumably driven by fears of upcoming capital gains tax (CGT) hikes.
In this blog, we’ll explore what a “bad budget” could look like, and what exiting business owners can do to navigate a new tax landscape.
What does a “bad budget” look like for business owners looking to exit?
Capital Gains Tax (CGT) hikes and the scrapping of Business Asset Disposal Relief (BADR)
At Hilton Smythe, we’ve been talking about what CGT changes might look like for a while. However, no expert consensus has yet to coalesce around the vague statements issued by members of the cabinet.
The IFS has advocated for the fairly radical measure of aligning marginal tax rates across all forms of gains and income in the name of creating a more “neutral” tax system. This would mean a 20% rate of CGT for basic rate taxpayers, 40% for higher rate taxpayers, and 45% additional rate taxpayers.
Treasury modelling reviewed by the Guardian bears these recommendations out, showing that officials have been testing a range of 33% to 39% for CGT.
However, economists at Goldman Sachs are more sanguine: they expect the Autumn Budget to bring a more “modest increase” in CGT – presumably a recognition that significant CGT increases could lead to behavioural changes that reduce revenue in the long-term. They do, however, expect these increases to be “coupled with scrapping business asset disposal relief” – that nifty little 10% tax saving on the first £1m in gains.
The scrapping of BADR will be particularly painful for vendors, translating to £200k in tax owed on a £1m business sale, compared to the £100k that would have been owed pre-Budget.
Changes to the inheritance tax (IHT) business relief
Some are predicting sweeping changes to the levy payable on the part of estates worth over £325,000.
Any changes to IHT exemptions related to business reliefs could throw a spoke in the wheels of entrepreneurs’ succession planning. For example, business owners passing their companies to the next generation could face a much larger IHT bill, potentially up to 40% of the business value.
Back in April, the Institute for Fiscal Studies (IFS) suggested capping business relief at £500,000 per person, with the unused portion of the allowance being transferable to a surviving spouse or civil partner. This would mean that a couple could pass on a business worth £1 million tax-free.
Alternatively, changes may come in the form of “tinkering around the edges” with changes to the business relief qualification criteria, such as the two year holding period requirement, or the introduction of graduated bands.
More hopefully, the accountancy firm Bishop Fleming suggests that Reeves may simply issue a consultation about these reliefs, rather than announce measures on Budget day.
Employee Ownership Trust (EOT) relief changes
Potential changes to EOT relief haven’t received as much media attention as CGT changes, affecting as they do a narrower segment of business exit plans. However, they are the most tax-advantaged way of disposing business assets and have received a flurry of interest in recent times. See the headlines here, or here, or here – all from the past few days.
It’s not outside the realm of possibly that the upcoming Budget might introduce limits on exempt gains per individual or adjust the current 0% rate to a higher, yet still favourable, rate compared to other sale options.
While it seems unlikely that the government will alter the fundamentals of EOTs, they might take steps to prevent scenarios where owners can effectively create two sale events—first selling to employees and then selling shares again later.
Other taxes that could eat into your bottom line
Your exit valuation might also be impacted by weaker bottom lines, caused by new burdens on businesses – such as employers’ National Insurance hikes and minimum wage hikes.
Last week, an NI hike for employers was all but confirmed, with the move expected to be the single largest revenue raiser in Wednesday’s budget. Goldman Sachs also expects the government to remove the national insurance exemption on employer pension contributions in a move expected to raise around £9bn a year.
If you’re an e-commerce player, there’s also been increasing talk of “levelling the playing field between the high street and online giants” – which could come in the form of a German-style “local corporation tax”, a type of tax based on profits rather than their property value.
Another challenge affecting businesses across all sectors will be the 6 percent minimum wage increase that Rachel Reeves will reportedly be handing to more than a million low-paid workers.
All these new burdens will cut into your bottom line, reducing the earnings measure used to value your business.
How can business owners looking to exit navigate a “bad budget”?
Focus on closing ahead of the end of the current tax year
It won’t be clear until budget day whether the relevant tax changes will come into effect immediately or in the next tax year.
If they don’t take effect until the beginning of the next fiscal year, it’s feasible (although not guaranteed) on typical mid-market M&A timelines to push through a deal before April 2025. We generally advise that business sales take six months to a year, not accounting for unforeseen delays.
Explore the suitability of an EOT
Whatever the Autumn Budget brings, an EOT will likely remain the most tax-advantaged option for disposing of shares. Currently, EOTs carry a 0% capital tax charge for selling shareholders, and offer income tax-free bonuses worth up to £3,600 per year for employees.
However, EOTs require specific compliance with shareholder and employee ratios: to qualify for the EOT’s CGT exemption, the company can have no more than two significant shareholder-employees for every five total employees.
They’ll also be more suited to businesses that want to maintain independence over selling to a trade competitor and that have a strong, positive company culture with engaged employees.
Think about MBOs and partial buy-ins
Partial buy-ins might also serve as flexible alternatives, especially if CGT or dividend tax increases make a full exit less attractive in the short term. They’ll allow you to retain some ownership while achieving partial liquidity.
And, with management more deeply invested in ownership, MBOs and buy-ins often drive motivation and alignment with long-term growth goals, potentially increasing company value over time.
Don’t let the tax tail wag the investment dog
“Don’t let the tax tail wag the investment dog,” so says the adage of the accounting world – which is to say that capital taxation is just one element in the mix. Protecting and enhancing business assets – through investment in future growth initiatives – and nailing down your business succession and tax planning strategy are other elements.
And, as we’ve said before, 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.
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.