What will a Labour government mean for selling your business?

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What will a Labour government mean for selling your business?

Experts say that stealth raids on capital taxes look likely as Labour, widely expected to form the next government, sits on an estimated £10.1bn spending gap in their fiscal plan, with repercussions for business owners looking to sell up.

What will a Labour government mean for selling your business?

The date has been set: on the 4th July, the British electorate will take to the polls to cast their vote.

All polling data points to a strong Labour majority, and the broadsheets are lining up to tell us what “a sea of red” will mean for business. Matthew Lynn for the Telegraph writes that a Starmer-led government would strengthen unions, cripple industry with “obsessive” net zero targets, and punish wealth creation and enterprise.

However, the financial markets have greeted the prospect of a Labour landslide with perfect equanimity. Keir Starmer and Rachel Reeves and their external affairs team have been lobbying City boardrooms like there’s no tomorrow, which has culminated in 121 business chiefs signing a letter published inThe Times endorsing the party’s economic plan.

Amidst all these confusing signals, we’ll be looking at what a Labour government will mean for your exit strategy.

Labour has been careful not to spook the (corporate) horse, and has by and large committed to maintaining the status quo. They have pledged, for example, to cap Corporation Tax at 25 percent for the next parliament and maintain the current structure of the R&D tax credit and Patent Box system.

However, it was Benjamin Franklin who said that “in this world nothing can be said to be certain, except death and taxes”, and there remains a cloud of uncertainty over how the party will fund its campaign promises on education and the NHS.

The Treasury estimates that Labour’s current tax and spending plans would raise an extra £6.1bn a year but cost as much as £16.2bn, leaving a £10.1bn funding hole.

One area where Labour hopes to raise £500m over its first five years is in the realm of private equity. In the UK, carried interest—the share of profits paid to private equity fund managers when their investments exceed a predetermined threshold—is currently taxed as capital gains at a rate of 28%. Labour intends to tax carried interest as income, potentially at the top marginal income tax rate of 45%, which could lead to an exodus of private equity fund managers.

Notably, Labour’s “plan for growth” also does not rule out raising Capital Gains Tax. In fact, Paul Dales at independent economic research business Capital Economics suggests that the Labour government may choose to fund their plans through hikes to interest and dividends, capital gains and inheritance tax – which are less controversial to the general populace and potentially lucrative.

CGT tax receipts, for example, increased by 14% between March 2022 and February 2023 – faster than any other personal tax receipts. The Office for Budget Responsibility estimates that in 2024-25, CGT will raise £15.2bn.

What will a Labour government mean for selling your business?

During the Corbyn era, shadow chancellor Rachel Reeves even proposed ramping up CGT in a 2018 pamphlet entitled, ‘The Everyday Economy’. She said:

“Taxing the savings and investment income of higher rate taxpayers can be increased. Capital gains tax could be reformed, halving the annual allowance, having it paid at income tax rates and improving tax compliance. Reform will need to be aware of the risk of the inefficient distribution of capital which gets locked into old investments out of investors’ fears of paying high capital gains tax.”

In the face of this economic and political uncertainty, business owners may wish to consider expediting their business exit strategy to lock in the current CGT rate.

The annual exemption amount has already been significantly reduced, dropping from £12,300 in the 2022/23 tax year to £3,000 in 2024/25 – highlighting the government’s growing dependence on CGT revenue.

And as Labour and the Conservatives alike sit on a gaping spending hole, more stealth raids on capital taxes by the incoming government look more likely than not.

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