AVOID AN INCREASE IN CAPITAL GAINS TAX

Exploring the potential increase in Capital Gains Tax under the Labour Government…

Many UK company owners are looking to avoid an increase in Capital Gains Tax (CGT) after it was reported the current CGT rate of 20% could be increased following the General Election. This is prompting impetus to accelerate exit plans to avoid a potentially greater tax liability.

There are implications of selling before a tax change to consider, differing between each exit strategy. For example, if you tick every box required to complete the sale of your business to an Employee Ownership Trust, the transaction will be tax-free.

Acquiring the right specialist advice means you will not have to pay more tax than required and prevents your company sale from being disrupted by unexpected disputes on the way to completion.

Your tax liability depends on what type of business you are selling – whether it is a limited company, you are a sole trader or operate a business partnership – how long you have owned the company, whether it forms part of your estate and whether it has commercial premises.

John Hunt, Corporate Finance Director at KBS Corporate, shared his thoughts on the matter following the election: “The Labour government has pledged not to increase VAT, Personal Income Tax or National Insurance, so other aspects of taxation are likely to be scrutinised closely.

“CGT has for a long time been on the radar of successive governments. Entrepreneurs Relief (renamed BADR) has already been targeted, taking the lifetime 10% rate allowance from ￡10m to ￡1m. It feels logical that CGT may be the next ‘easy’ target. Any increase in CGT from the current rate of 20% will be painful for business owners looking to sell.

“Early planning is key and holding back on selling in anticipation of profit levels, and therefore Enterprise Value increasing, suffers the risk of any upside being cancelled out by an increase in CGT.

“Wider global economic conditions and general trading cycles also need to be factored into the decision as to when to start the process of selling, and a potential increase in CGT only increases the urgency for company owners to consider their plans as a matter of routine.

“KBS is the UK’s leading business sales company and part of our professional team is K3 Tax Advisory (K3TA). KBS works with K3TA on the majority of our clients’ sales, minimising tax due on sale proceeds. The potential for an increase in CGT is one closely considered by both our Corporate Finance advisers and our tax colleagues when discussing timing and planning of a sale with our clients.”

Holly Bedford, K3TA Managing Director, commented: “Capital gains are currently taxed at lower rates than employment income. Labour have repeatedly commented that they will not increase taxes for ‘working people’ and are less sympathetic to unearned income, which is likely to mean a focus on CGT and Inheritance Tax to raise more tax.

“Shares in trading companies have historically had tax-favoured status and this could change in the budget, so it is important for business owners to look at their plans for the future now.”

At KBS Corporate, our team recognises common tax factors which will help your deal to progress smoothly and maximise shareholder value. If you are interested in exploring a sale, get in touch with us to take advantage of the current activity we are seeing from buyers and investors.