With potential new Capital Gains tax hikes on the horizon, business owners who are thinking of selling or exiting their business are being urged to explore their options now.
The Government’s generosity with furlough and funding support has mitigated potential business disaster in the UK during the pandemic. But everyone anticipates the Treasury trying to claw its funds back in future years and Capital Gains Tax, which has implications for those selling their business, may well be near the top of Rishi Sunak’s list.
Graham Cornforth, corporate finance partner at Azets in the North East, says given that prospect, business owners in the North East considering a sale or exit should seek professional advice to mitigate the risk of a potential increased tax liability.
“Despite record levels of mergers and acquisitions (M&A) activity in the build-up to the Budget – with Azets advising on 50 deals in just 10 weeks – no announcement was made, and CGT reform was again overlooked,” said Graham.
“It is now considered that the changes, which could potentially include more than doubling the top rate from 20 per cent to 45 per cent and taxing accrued profits of owner-managed companies at income tax rates, could be announced during the Autumn Statement 2021 or Spring Budget 2022.
“Rumoured changes to Capital Gains Tax haven’t happened yet but, politically, it remains a soft target and we consider there to be a relatively high likelihood of reform this autumn or in spring 2022.”
For many businesses, the pandemic has presented opportunities to trade at or above normal levels and demonstrate a strong, resilient business model. However, delaying a sale to fulfil growth ambitions might be futile if value growth is outweighed by tax increases.
Graham said: “We’re encouraging business owners to seek professional advice in order to understand the best course of action for their circumstances and ensure they are making the best financial decision ahead of any changes to CGT.
“All in all, for many businesses, if a sale or exit is being contemplated in the next two or three years, then 2021 could be the time to consider accelerating those plans.”
There are other less conventional exit routes for shareholders that offer attractive tax savings including employee ownership trusts (EOT). EOTs (aka the ‘John Lewis’ model) can create an effective means of succession planning and an alternative to the more conventional exit routes for shareholders, such as a trade sale or a Management Buy-Out.
With appropriate preparation and employee engagement, the EOT model can help deliver a robust, diverse and employee-centred business structure, while affording attractive tax savings to shareholders.
Graham explained: “The idea is that the existing shareholders sell a controlling stake of the company to the EOT, which holds the shares on behalf of the employees.
“The sale takes place at market value, and funding may either be by the provision of external finance or internally through the company generating the funds to repay the exiting shareholders over a period of time.
“These sales tend to be quicker and smoother than a sale through a third-party purchaser. This is down to fewer negotiations. EOTs are increasing in popularity but careful consideration needs to be taken to ensure it is the right strategy for your business.
“Azets has worked closely with many businesses in the region in selling or exiting their businesses and is well-placed to provide advice across the full range of key areas such as taxation, independent valuations, funding options and practical transactional support. We provide trusted independent advice and a straightforward, personal approach.”