For the most part, the Budget was a bit of an non-event. Kemi Badenoch summed it up by asking – is that all? However, it did include two rather spiteful measures. The first was a 4% surcharge on income that landlords earn from their rented properties. Many landlords will avoid this by transferring their properties into limited companies. The second measure was to reduce the lifetime limit for Business Asset Disposal Relief (BADR) from £1 million to £500,000.
The chancellor gave an assurance that he would not increase the rate of capital gains tax. Despite this, just a week later he announced a tax change that will cost business owners up to £30,000 each in extra tax when they sell their business.
Entrepreneurs’ Relief was first introduced on the 6th of April 2008. The original limit was £10 million which gave business owners a potential tax saving of up to £1.4 million. The relief was brought in to encourage entrepreneurs to set up new businesses and it was a very compelling reason to do so.
Entrepreneurs’ Relief was renamed Business Asset Disposal Relief and on the 11th of March 2020 the £10 million lifetime limit was reduced to just £1 million, giving a maximum tax saving of £140,000. Business owners were furious about this and the number of multi million pound businesses that we sold during the following year fell through the floor. Over time however, some entrepreneurs got used to the higher tax rate whilst others moved abroad to avoid paying any capital gains tax at all.
Over the next few years, the rate of tax that was payable under the BADR scheme increased from 10% to 14% and then to 18%. This eroded the value of the benefit still further. The latest change in the BADR is however a real kick in the teeth for business owners. There was very little warning that it was going to happen, and a lot of people have been caught out. The people who have been affected can hardly be thought of as wealthy. A letting business that turns over £500,000 per year is unlikely to make a profit of more than £100,000 a year. Nevertheless, a business like this could easily sell for £1 million and the owner would now be hit with an unexpected additional tax bill of £30,000.
A natural instinct for many people is to try to sell their business before the tax change comes in. However, for most people this could turn out to be an expensive mistake. A business cannot be sold overnight. It usually takes at least a month to prepare a business for sale. We need to carry out the statutory AML checks and we need to prepare a comprehensive marketing information pack with accurate figures which correlate precisely with the accounts. If this process is rushed, there is a risk that mistakes will be made which could have serious consequences later in the sale.
Once the information pack is ready, the marketing campaign will typically take six weeks. Again, if this is rushed potential buyers will be missed or may not be able to make an offer in time, and the price achieved for the business might be much less than it could have been. Another problem at this time of year is Christmas. A successful marketing campaign relies on momentum, and it would be a grave mistake to start a marketing campaign at the beginning of December then have to stop for two weeks over the Christmas period .
Once a sale is agreed, it usually takes about 12 weeks to complete the transaction, so unless terms have been agreed by Christmas, it is unlikely that the sale will complete before the end of the tax year on the 5th of April. Paying an extra £30,000 in tax is very annoying, but if the sales process is rushed, the reduction in the sales price that is achieved could outweigh the extra tax bill many times over.
Taking everything into account, my advice to business owners would be not to try to rush to get their transaction completed before the 5th of April. However, I think it is highly likely that BADR will be abolished altogether in the next budget. I also think it is highly likely that the rate of CGT will be also be increased. If it is, the increase will probably take effect from 5th April 2028. With this in mind, I would urge people who are thinking of selling their businesses to make very sure that they complete the transaction before the end of the next tax year. This gives plenty of time to prepare thoroughly for the sale in order to ensure that the maximum sale price is agreed. However, it still gives protection against future changes in the tax system.
If you are not planning to retire before April 2028, an alternative option would be to set up a group holding company. The cost of doing this is significant, so it is only appropriate for the owners of quite substantial businesses. However the potential tax savings can be very significant. A consultation paper on how to prevent people from doing this has just been announced, so if you are thinking of setting up a group holding company, it would be wise to do this sooner rather than later. For the very wealthy, of course there is always the option of becoming a tax exile.
Adam Walker is a business sales broker who has specialised in the property sector for 44 years.
