One in three business owners are fast-tracking sales as capital gains raid looms

Business owners are bringing forward their exit strategies in anticipation the Government will stage a capital gains raid at the Budget.

A survey by wealth manager Evelyn Partners found 29 per cent of entrepreneurs have fast-tracked their exit plans, up from 23 per cent 18 months ago.

The Government has ruled out increasing the main rate of corporation above 25 per cent and has pledged to freeze headline rates of income tax, national insurance and VAT.

However, the Prime Minister warned that the Budget on 30 October will be ‘painful’ and remains tightlipped on any changes to capital gains tax (CGT) or inheritance tax (IHT) relief.

Currently, CGT rates are significantly lower than income tax rates, with basic-rate taxpayers paying 10 per cent on most gains and 18 per cent on residential property.

There has been speculation that Rachel Reeves may seek to equalise CGT with income tax rates, which could see some people taxed as much as 45 per cent on their gains.

Business Asset Disposal Relief, formerly Entrepreneurs’ Relief, which allows business owners to pay a reduced CGT rate on gains up to £1million, may also be looked at.

As a result, business owners are taking matters into their own hands by rushing to sell ahead of any anticipated changes to avoid paying higher taxes.

Nearly a quarter of those surveyed with turnovers of £5million+ have accelerated their plans because of capital gains tax (CGT) worries.

A further 20 per cent have brought forward plans over the past 12 months in anticipation of potential cuts in inheritance tax relief.

Laura Hayward, tax partner at Evelyn Partners said: ‘As opinion polls increasingly suggested a change in government and the consequential potential for tax changes was becoming more likely, an increasing number of business owners have got in touch with us to have conversations about business exits.’

David Goodfellow, head of UK financial planning at Cannacord Genuity told This is Money that he had had more clients inquiring about CGT for both business and property transactions. Others were ‘sitting on their hands.’

‘I suspect what we’re seeing is those clients who have made a decision or in the throes of making a decision on looking for a buyer… they’ve accelerated that.

‘We all know that the timeline involved in either of those decisions have less control. You’ve got to find a buyer and there’s generally a fair chunk of administration, legal work, negotiating to be done.

‘While I’m not making a prediction that there’ll be a change, I think it’s pretty certain CGT isn’t going to be any lower, so why wouldn’t you get on with a transaction and hopefully the same level of CGT?’

He also warned that any ‘punitive’ tax would have an effect on the wider business landscape as more people are discouraged to sell or take risk.

‘Watering down those attractive tax reliefs that business owners have seen in the past, or indeed raising tax on people who have taken risk, is going to be discouraging.’

There are other factors at play beyond the looming budget. A quarter of business owners say they have brought forward their exit to access capital tied up in their business. 

A further 24 per cent said they were looking to sell as the cost of accessing capital has increased as a result of rising interest rates.

Hayward said: ‘The business environment for many owners has already been tough enough in recent years as they have worked hard to rebuild their businesses after the pandemic, against a backdrop of cost-of-living pressures and high inflation. 

‘Add to that the potential for unfavourable tax changes in the upcoming Budget and it’s completely understandable that some are hoping to realise the gains of their successes sooner rather than later.’

While some business owners might be reconsidering their exit strategy to avoid higher taxes, it comes with some risk.

Any sale driven by concerns around tax will likely see some of the gloss coming off the sale, which will see a weakening in price.

Goodfellow says: ‘To be clear, if a client says do you think I should get on sell my business because taxes are going to go up my stock answer is no. Because you dont know that taxes are going to go up. 

‘You shouldn’t be taking an action because of speculation on what may or may not happen in the future. That is always the wrong reason.’