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‘The Chancellor is going to need to raise some serious money over the coming years’

Business owners contemplating selling should be wary of the government’s plans for Capital Gains Tax, warns corporate finance specialist Watersheds

COMPANY owners contemplating selling their business in the not too distant future need to get on with it quickly, or risk facing a potentially substantially higher tax burden when they do, a corporate finance specialist has warned.

The Chancellor of the Exchequer’s recent announcement that he has commissioned a review of Capital Gains Tax in relation to individuals and small businesses cannot conceivably bring good news for business owners, says Sue Green, a partner at Northampton-based Watersheds.  

Sue Green, partner at corporate finance specialists Watersheds

Rishi Sunak has tasked the Office of Tax Simplification to consider the overall scope of Capital Gains Tax and the reliefs, exemptions and allowances that apply to it.

“He has specifically asked the Office to look at how gains are taxed compared to other types of income,” says Ms Green. “At the moment, CGT on the sale of shares is calculated at 10% or 20% depending on whether you qualify for Entrepreneurs’ Relief.  This is in stark contrast to the taxation of income at 20%, 40% and 45%. 

“Put bluntly, if you sell your business for, say, £5 million while the current rules apply to CGT, and subject to meeting the Entrepreneurs’ Relief criteria, you will have to pay around £900,000 in capital gains tax.

“If the outcome of this review is that personal capital gains are to be taxed at the top slice on an individual’s income at the same rate of income tax, the capital gains tax bill could be up to £2.25 million.”

Some owners may feel reluctant to consider selling now, given the uncertainty around the coronavirus pandemic, she adds. But in fact it is still possible to sell a business for full value in the current market.

“We have already completed two deals for clients during lockdown, and are near to completing a third,” said Ms Green. “The companies being sold were very different but in each case the client was pleased to complete the sale at the value anticipated prior to lockdown. One sale was a management buy-out of a division of a civil engineering contractor and the second was the sale of a specialist music company.”

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Those who own and run their own businesses have already seen their tax burden rise considerably over the past few years. First there was the overhaul of the taxation of dividends, which has led business owners to pay more tax on the income they extract from their businesses. 

Then, in this March’s budget, the Entrepreneurs’ Relief allowance (which allows those who sell shares in a private company to pay 10% instead of 20% Capital Gains Tax) was slashed from £10 million to £1 million.

“The mood music is clear – I don’t think you have to be a rocket scientist to understand that the Chancellor is going to need to raise some serious money over the coming years,” said Ms Green. “There is going to be a debate about why those selling capital assets should pay less tax than they do on income.

“I just want to get the message out that the tax that business sellers pay is almost certainly going to go up and has the potential to go up quite substantially. 

“So, if you were considering selling your business, but have put plans on hold because you felt the market doesn’t feel promising, it’s worth reconsidering – and swiftly. 

“Start the discussion and the process as soon as you can and you could avoid giving a much larger slice of what you receive to the Treasury.”