A new government: succession and speculation over changes to CGT

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For multiple businesses owners who have been operating for many years, especially family-owned businesses, what succession will look like is likely to be front of mind. 

Succession can take a number of different forms e.g. sale to a third party, management buyout or passing the business to the next generation, and the route your business takes will have an impact on your retirement plans of the owners and your family.

For some, a third party sale releases the value in the business, allowing the owners to plan for their financial future. This often comes with a strong desire to protect that wealth, by ensuring funds are invested in a way that matches risk, whilst protecting family’s assets from unwanted claims.  However, before you can consider the protection of your assets, you need to understand what funds you will be left with after the sale. 

Business Asset Disposal Relief (BADR) and current Capital Gains Tax rates

Currently, a trading business (this doesn’t include ‘passive’ businesses such as property lettings) can benefit from Business Asset Disposal Relief (BADR), previously known as Entrepreneur’s Relief. If eligible, this reduces the rate of Capital Gains Tax (CGT) to 10% on disposals up to £1 million (the lifetime limit), with the remaining balance taxed at 20%.  The issue that may be weighing on the minds of some business owners is, where will CGT rates end up?

Speculated changes to Capital Gains Tax

There has been speculation about whether Labour will increase the rate of CGT to raise sums estimated at up to £8bn to help fund public services, but, as yet, this is a subject on which they would not be drawn. However, it is worth noting that it is only since April 2008 that gains have not been taxed at marginal rates, generally the top rate of income tax. If this were to be reintroduced any sale of a business would be taxed much more heavily.  Assuming there remained a business relief, allowing £1 million of any sale to be taxed at 10% (and there have been reliefs like this for many years), then it would only be the amount above £1 million that would suffer tax rates as high as 45%.

As an example, a business sold for £2 million would currently suffer tax of £300,000, leaving the owner £1.7 million for their retirement.  Whereas, if there were to be a change in the rates to align with an individual's marginal rate, then this tax bill on sale could increase to £550,000 - an increase of £250,000, an 83% increase in the tax due. 

Planning for the Sale

There is often planning that can be undertaken in advance of any business sale, but this needs at least two years to implement, although it can ensure there is more than one 10% band spreading the tax, but also the proceeds across spouses and family members. However, this assumes that the new Government decides to retain BADR.

Navigating change

As the new Labour Government takes charge, individuals must adapt to potential changes in policies and taxes. If planning for succession is a key priority it is important to consider how any future changes could impact your plans.

Experts from our tax, financial services and accounting teams will be analysing the budget and will discuss the implications of the announcements for individuals and businesses in a live webinar at 9.30am on Thursday 31 October.