The new Government’s first Budget is set to be delivered on 30 October 2024 and business owners should carefully consider taking steps now to minimise the potential impacts of speculated tax hikes.
After promising not to raise income tax, national insurance and VAT, there is heavy speculation that the Labour Government may seek to make changes to capital gains tax (CGT) and inheritance tax (IHT) to help reduce the ‘£22bn black hole’ in public finances.
It has been speculated that CGT rates will be increased to align more closely with current income tax rates. Business sellers may potentially be hit even harder by a speculated cut to or even total removal of business asset disposal relief (formerly known as entrepreneurs’ relief), which currently operates to reduce CGT from 20% to 10% for certain business assets.
It is also considered likely that certain favourable IHT reliefs may be restricted or even removed, including potentially the IHT business property relief that allows qualifying business property to be passed on at an effective IHT rate of 0%.
Next steps
If the CGT and/or IHT rates are increased, there is a significant likelihood that the new rates could take effect immediately (on 30 October).
Accordingly, business owners should urgently consider whether it may make sense for them to take advantage of current rates in advance of the October budget by using any of the following options:
- Third party share sale
If you are already negotiating a sale with a third party buyer it may well be worth doing everything you can to get the deal over the line and reach unconditional exchange of contracts by 29 October. If you have not yet found a buyer or progressed negotiations with them it may well be too late to complete the deal before 30 October, but you might consider one of the below options as a stop gap or alternative.
- Management buyout
If some or all of the company’s existing management team are willing, able and appropriate to take ownership there are possible transaction structures to potentially achieve a satisfactory sale for the business owners in a relatively short timeframe.
- Employee ownership trust
Businesses may also consider selling to all the company’s employees through an employee ownership trust. This structure currently allows business owners to claim full CGT relief.
- Reorganisation
If it is not possible or desirable to find a buyer for your business at this stage, it might be worth considering some form of restructuring, share buyback and/or transferring shares to a trust or other family members. In the right circumstances this could be used to crystallise some or all of the existing capital gain and potentially reduce the ultimate tax hit when you come to sell to a third party – or to make the most of current IHT reliefs.
- Solvent liquidation
If a sale, transfer or restructuring is not possible or desirable, it might even make sense for particular businesses to consider a voluntary winding up to extract capital at favourable rates before the Budget.
Having said all that, it is important not to rush into the wrong sale or reorganisation. Bringing forward a transaction that is in the best interests of all parties could make sense but business owners should be cautious about the possibility of entering into transactions that might not be necessary or beneficial.
If you are considering taking action and would like our input on any of the above in advance of the Budget please get in touch with Philip Deja, who heads up our corporate team.
