Budget 2021: No change to Capital Gains Tax rules for business sellers… for now!
Friday, 05 March 2021
Following on from the Office of Tax Simplification (OTS) report in early November 2020, there’s been speculation that the rate of Capital Gains Tax for individuals would increase. The report, commissioned by Rishi Sunak, recommended equalising Capital Gains Tax rates with income tax rates, which would more than double rates for some business owners looking to sell. You may recall that Business Asset Disposal Relief (BADR), previously referred to as Entrepreneurs’ Relief, was severely restricted in the March 2020 Budget to cover only the first £1m of lifetime gains. If the main rate were also increased from 20% to align to income tax rates, then business owners would need to increase the value of their companies to take away with the same net proceeds after tax. With this backdrop in mind, there’s been a mad rush for Corporate Finance teams and Corporate lawyers to get deals done by close of play on 2 March, before the seemingly ‘inevitable’ increase to Capital Gains Tax. At Larking Gowen, we had one deal complete on 1 March and two on 2 March, whilst others completed with more breathing space.
Thankfully for business owners, the Budget 2021 didn’t deliver any changes to Capital Gains Tax rates or reliefs for individuals, meaning those business owners, qualifying for BADR, can still sell shares at an effective 10% rate on the first £1m of lifetime gains and 20% on any amounts over £1m. As far as taxes go, this is very attractive. So, we all worked our socks off to get transactions complete…for seemingly no reason, or did we?
Despite the positive Budget outcome for business owners, many tax specialists speculate that this might just be kicking the can down the road and that Capital Gains Tax rates are likely to go up in the future. Indeed, there’s a new ‘tax day’ taking place on 23 March 2021, when the Government will publish a range of tax consultations with calls for evidence from professionals. The aim is to allow for more transparency than would be published in a Budget and allow tax professionals to help shape policy and plan in advance for expected changes. Capital Gains Tax is expected to be a key discussion point and the fact that Rishi didn’t mention Capital Gains Tax in the Budget means he’s likely keeping his powder dry.
Of course, we don’t have a crystal ball to tell us when or by how much rates might change. The common conclusion, sadly, is that any potential tax changes are likely to see increases to Capital Gains Tax. Therefore, if succession planning is already on your agenda, now could be a better time than ever to facilitate an exit whilst the tax regime remains favorable. It’s probable that we’ve got another 12 months for business owners to make use of the current regime – and it can take 6-9 months to complete a deal. Now could be the time to think about executing a succession plan or taking your company to market.
There are other positive forces at play too:
• Private Equity Firms ever-growing ‘war chests’ – Private equity firms have significant funds to invest, and they are increasing their investment within the SME sector (small or medium-sized enterprise with fewer than 250 employees) specifically in East Anglia. Foresight East of England Fund launched in late 2019 with a £100m fund dedicated to buying and investing in businesses in the Eastern region.
• Cash rich businesses with low interest rates – Businesses with cash in the bank are earning little interest, so are actively seeking acquisitions as a way of improving their return on surplus cash. Likewise, the cost of borrowing is cheap giving buyers access to cheap capital to invest in expansion via acquisition.
• Pent up demand and supply – Due to the lower level of transactions seen during the pandemic there is a high demand for good quality acquisitions as well as a high supply of business owners who see this as the right time to sell.
Our dedicated and experienced Corporate Finance team has advised a wide range of clients for many years and overseen many exits for shareholders, via trade sale, management buyout, and, more recently, employee ownership trusts.
If you’re interested in looking at your succession options, including the sale of your business, please contact me, or James Lay, and we’d be pleased to explore your options with you. You can find contact details on the Our People section of the Larking Gowen website. Alternatively, call 0330 024 0888 or email firstname.lastname@example.org.