With rumours rife that an increase Capital Gains Tax (CGT) will be announced by Rishi Sunak during his budget on 3rd March, it’s worth calling on business owners to act now should they be considering selling their business.
The expectation of many is that we will see the rate of CGT change so that it equals Income Tax. For many business owners that means a doubling of their tax, or even more.
Anyone with taxable income between £50,000 and £150,000 pays 40% income tax and 20% capital gains tax on profit made from selling their business. If you’re lucky enough to earn over £150,000, income tax is 46%. So setting CGT at the same rate as income tax is a doubling the rate – from 20% to 40% – and it’s more for the highest earners.
Business owners could further stand to lose out significantly at a time when they have already experienced extreme strain.
For individuals feeling burnt out by the impact of the pandemic or for those close to retirement, they should consider selling up now, to maximise the window before the budget is announced. Otherwise they could lose thousands of pounds of potential return.
Business owners have already been hugely impacted because of the pandemic, with many either utilising their own personal savings or heavily relying on funding from Government to survive – either through grants or by accessing furlough funds – and they are nearing the decision to exit. Equally, there will be many owners of businesses who are close to retirement and therefore considering selling up or transferring ownership. The simple message is that there is a further complication. There’s a real risk that the cash in your pocket after a deal is less on the 3rd of March, so if you are thinking of selling up any time soon then now is the time to act.
It is likely that we are currently experiencing the lowest tax regime that we will encounter for many, many years. A substantial rise in tax is expected, to help recoup the financial support offered to individuals and businesses over the last year. Last October, the IFS (Institute for Financial Studies) said tax rises were “all but inevitable”. Right now, the question surrounding an increase in CGT looks like it is not if it will happen, but when it will happen. For those who had been considering selling their business, or a stake in their business, it’s vital that they quickly decide if they want to progress.
While many might claim Business Asset Disposal Relief, it only applies to the first £1,000,000 of profit and there are some criteria. If you don’t qualify, or the consideration is more, then the full rate of CGT applies.
Of course, this is speculation. But many commentators think a change to CGT is likely and also that it could happen without notice. The replacement of Entrepreneurs Relief was announced in the 2020 budget. Those changes took place immediately, so there is the real risk that any new changes to Capital Gains Tax happen when the budget is announced in March.
It seems sensible to act now, when CGT rates are known. We are also assuming that Business Asset Disposal Relief and the rates of income tax are not changed in the Budget.
With all the anxiety that business owners have faced this past year, the uncertainty around timing of the increase in this tax adds even more pressure to an already exhausted business community. With all the anxiety that business owners have faced this past year, the uncertainty around timing of the increase in this tax adds even more pressure to an already exhausted business community.
If you or your clients needs advice on deal structuring then now is the time to speak to us
If you would like further information on the topic discussed in this blog, please contact Derek Hamill by email: firstname.lastname@example.org or by phone: 0141 530 2022 / 07973 924 333. You can also view Derek’s profile by clicking here.
The information and opinions contained in this blog are for information only. They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice. Before acting on any of the information contained in this blog, please seek specific advice from Gilson Gray.