The Impact of the Autumn Budget 2024 on SME Owners: What You Need to Know

With the Autumn Budget set for 30 October 2024, SME owners should be preparing for changes that could affect both day-to-day operations and long-term exit strategies. Chancellor Rachel Reeves has confirmed that Labour is aiming to address the ￡22bn public finance gap, and tax adjustments are on the horizon, potentially taking effect immediately after the Budget announcement.

While Labour has pledged not to raise National Insurance, Income Tax, Corporation Tax, or VAT, there are no guarantees that taxes like Capital Gains Tax (CGT), Inheritance Tax (IHT), Stamp Duty Land Tax (SDLT), and pension tax relief won’t be affected. Below is an overview of what these changes might mean for business owners, alongside advice on steps you can take now to protect your interests.

Capital Gains Tax (CGT) and Business Asset Disposal Relief (BADR)

CGT currently sits at 20% for shares, which is lower than both the top dividend tax rate (39.35%) and the higher income tax band (45%). However, there's growing speculation that Labour might align CGT with income tax rates, which could lead to a substantial increase in the cost of selling a business. Given the potential for this change to take effect immediately after 30 October, business owners considering an exit should act now to avoid a sharp tax increase.

In addition to potential CGT rate hikes, Business Asset Disposal Relief (BADR), which allows owners to sell their businesses with just a 10% CGT rate on the first ￡1m of lifetime gains, may be at risk. While Labour may consider raising the ￡1m limit, it's equally possible they could further restrict or even abolish BADR altogether.

Another possibility is the removal of Principal Residence Relief, which currently protects individuals from CGT on the sale of their main homes. While this is less likely, any reduction in this relief could see it replaced by a rollover mechanism or a cap, affecting those with significant property holdings.

Inheritance Tax (IHT) and Business Property Relief (BPR)

Labour is also eyeing changes to Inheritance Tax (IHT), particularly through adjustments to Business Property Relief (BPR). Currently, BPR offers up to 100% relief on qualifying business assets, such as shares in a trading company. However, there are rumours that BPR could be capped at ￡500,000 per person. This cap could have a catastrophic impact on business continuity, as it may force the sale of business assets to cover IHT liabilities.

Additionally, Labour may tighten what constitutes a "qualifying" business asset, particularly excluding certain investment activities, which would require business owners to reassess their holdings and potentially restructure their companies to protect trading activities.

Pensions and Lump Sum Allowance (LSA)

Labour has confirmed it will not reintroduce the Lifetime Allowance (LTA), but it could reduce the Lump Sum Allowance (LSA) or change how pensions are taxed on death. The tax-free cash an individual can take from their pension could be reduced, and the ability to pass pensions on tax-free at death is under review. Given that pensions represent a significant store of wealth for many business owners, these changes could affect future retirement and succession plans.

HMRC and Increased Scrutiny

One of the key developments to be aware of is the expansion of HMRC's resources. An additional 5,000 staff will be hired to boost compliance activity across sectors, with a focus on employer obligations, National Minimum Wage, VAT, IR35, and R&D claims. If your business hasn't had a compliance review in the last five years, it's highly likely you could expect one soon.

This increased scrutiny makes it more critical than ever for SMEs to ensure that all their compliance processes are up to date and in line with the latest tax regulations. Any non-compliance identified in future audits could lead to significant penalties, adding to the potential tax burden introduced in the Autumn Budget.

Exit Strategies for Business Owners

For those considering an exit, the impending Budget may make it advantageous to act quickly. A few options to consider include:

1. Accelerated Third-Party Sales If CGT or BADR changes are announced, selling to a third party before 30 October could lock in the current, lower rates. However, this requires careful planning, as both the buyer and seller need to align on timescales to avoid falling into the new, higher tax brackets.
2. Management Buyouts (MBOs) Selling to your existing management team might be a quicker alternative if finding an external buyer proves difficult. A friendly MBO process can often be expedited, avoiding the extensive due diligence typically required in third-party sales.
3. Employee Ownership Trusts (EOTs) If you’re looking for a longer-term solution that benefits both you and your employees, selling to an EOT may be a tax-efficient option. Not only do EOTs allow for 100% CGT relief on the sale, but they also support employee retention and motivation. EOTs are likely to maintain favourable tax treatment, even if CGT increases, making them a solid choice for future-proofing your exit.
4. Business Restructures and Share Buybacks If a full exit is not feasible within a short timescale, a restructure or share buyback could help crystallise gains at current tax rates. Share buybacks must be carefully structured to ensure they are treated as capital transactions rather than distributions, and HMRC clearance may be required.

Final Thoughts

With the 2024 Autumn Budget fast approaching, business owners should be prepared for significant changes in the tax landscape. While Labour’s focus on raising taxes will likely spare income and working taxes, the potential impact on CGT, IHT, and BPR means now is the time to take stock of your exit strategy. For those considering a sale or succession, acting before 30 October could save substantial tax, while others may need to reassess their financial planning and business structure to protect their interests in the long run.