With the Autumn Budget delivering an immediate rise in Capital Gains Tax (CGT) rates, business owners considering a sale or management buyout (MBO) may want to take action now before changes in Business Asset Disposal Relief (BADR) come into effect.
For those eyeing an exit, this Budget has drawn a clear line in the sand: early planning and swift decisions may well be your best strategy to secure a favourable outcome.
Rising Capital Gains Tax: The new landscape
The Budget outlined a jump in CGT rates that applies immediately to both basic and higher-rate taxpayers.
The basic rate of CGT has now risen to 18 per cent, up from 10 per cent, and the higher rate is now at 24 per cent, compared to the previous 20 per cent.
Though these rates for residential property sales have remained the same, the impact on business exits is pronounced.
Business shares, which form a significant part of most business exit transactions, will now attract these higher rates.
The immediate jump, particularly for those at the basic rate, could significantly reduce the after-tax value of a sale.
For business owners who planned on benefitting from the lower CGT rates, this Budget’s swift implementation leaves little room for manoeuvre.
The changing face of Business Asset Disposal Relief
Traditionally, Business Asset Disposal Relief (BADR) has offered some much-needed respite for business owners when selling qualifying assets, allowing them to benefit from a reduced CGT rate of 10 per cent regardless of their marginal tax rate.
This relief, formerly known as Entrepreneurs’ Relief, has been a critical tool for owners aiming to maximise the return on their life’s work and retire comfortably.
With a lifetime allowance of £1 million this relief has provided a tax efficient means to sell or pass on a business.
However, the Budget has set out a phased reduction in this relief, which will see the rate rise to 14 per cent from April 2025 and then further to 18 per cent in April 2026.
For business owners who were banking on BADR, these gradual increases represent an erosion of potential savings on their tax bill.
Whilst these rates are still lower than the standard CGT rate, it will nevertheless be a blow to those hoping to exit in the next five to 10 years.
This development not only narrows the benefits of BADR but also compresses the window for achieving a tax-efficient sale.
The case for accelerating your exit strategy
For those considering a business exit or MBO, now may be the time to move quickly.
With CGT rates already higher, any further delay risks falling into the BADR increases that will make exits less profitable.
Forward planning and fast action could see business owners capitalising on the current BADR rate and thus maximising the retained value from their business.
Early exits may also present an opportunity to secure a competitive position in the M&A market, where demand remains strong for viable, profitable businesses.
This could be diminished, however, if the market is soon flooded by lots of similar offerings – potentially devaluing your current shareholding.
Key considerations for your exit plan
- Timing: Consider an exit before the BADR rate increase in April 2025. By moving forward with your sale, you could save a significant sum in tax, which could be reinvested or used to support retirement.
- Valuation and negotiation: The recent tax changes may influence buyers’ pricing strategies. Working with an experienced advisor to negotiate terms and pricing that reflect the increased tax burden could strengthen your position.
- Alternative structures: If a sale isn’t feasible in the short term, consider options like management buyouts (MBOs), which allow the business to remain within familiar hands while securing your financial interests.
- Get expert advice: A knowledgeable accountant or financial advisor can help navigate the complexities of a sale or MBO, ensuring compliance and optimisation within this evolving tax landscape. Expert guidance can be essential in timing the sale and structuring it in a way that minimises tax exposure.
Next steps
For business owners, the current tax environment calls for a proactive approach. By seeking professional advice and exploring options to expedite your exit, you can protect more of the value you’ve built.
These new CGT rates, combined with the upcoming changes to BADR, make it crucial to act sooner rather than later.