Capital Gains Tax: Is a change coming?
Last month, the Chancellor put business owners on notice: would capital gains tax (CGT) be increasing? The Chancellor published a letter to the Office of Tax Simplification (OTS) where he asked the OTS to undertake a review of the capital gains tax (CGT) system, to ensure the system is ‘fit for purpose’. In response, many analysts have opined that an increase in CGT may be on the cards, especially as the government will need additional revenue to support its recent increased borrowings. Although the Autumn Budget was cancelled last week in light of the pandemic, it is still interesting to consider what the possible changes to CGT could mean for business and individuals next year, and how owner managers may need to accelerate exit plans to avoid expected rises.
Currently, Entrepreneurs Relief affords CGT rates at lower levels than income tax at 10% for the first £1 million of gains in a lifetime and a normal CGT rate of 20% for gains above this level (or at 18% and 28% where gains relate to residential property, other than your principal residence). With the current economic environment being derailed by the COVID-19 outbreak, CGT could be hiked closer to income tax. In other words, a potential increase from 20% CGT (after the first £1million of gain) to 45%!
Considering a business sale?
So, if you may be thinking about selling your owner managed business at some point, come the March budget in 2021 your tax bill on disposal may more than double overnight. Therefore, business owners should consider acting before any CGT changes.
Of course, we can’t predict the future and exact changes to CGT are yet to be announced. However, if they do go ahead as many predict, this has the potential to shift business owner’s mindsets if capital gains and income taxes align, which is hugely significant for entrepreneurs who have invested and grown their business over time.
There are still many active buyers out there, focused on how businesses are coming out of lockdown and responding to the ‘new normal’, rather than what happened during it. Even if the headline selling price may now be lower than it would have been in January, business owners may net more proceeds in their pocket by exiting before April, after taking into account potential tax savings.
A normal sales process may take several months, but due to possible tax changes in the near term, business owners would be well advised to at least consider their options now to prepare for a sale in order to optimise their tax situation.
An option could include a partial sale of ownership, as long as it is not less than 51% in order to qualify for CGT treatment.
Given what we have said above, it is also a possibility that owner managers may have insufficient time to complete a business sale prior to the proposed tax changes. With that in mind there are also firms which specialise in undertaking transactions to effectively shield the owner manager’s current, and even aspirational value, from tax changes. Therefore, this is another option for consideration if there is a desire to sell the business within the next 10 years. Those interested in learning more about these options please contact us and we can affect introductions for further discussion.
Below are a few best practice tips on how to prepare your business for sale, to help ensure a smooth sale process and give the buyer the impression of a well-disciplined and carefully managed business. Kerman & Co has extensive experience in advising owner managers on the successful sale of their businesses. We can assist owners from the initial preparation stage, right through to completion.
Best Practice tips on how to prepare and groom your business for sale:
- Financial Matters – Financial due diligence is one of the most important elements of a buyer’s due diligence. The buyer will be concerned with historical financial statements as well as the reasonableness of projections for future performance. If the figures provided do not add up, then the credibility of the seller will be weakened.
- Company Books and Filings – Check that all Companies House filings have been made and the company’s statutory books are up to date. Failure to file or filing errors do not create a good first impression.
- Existing Arrangements – Review agreements with key suppliers and customers. Make sure that they are all recorded in writing, signed and dated. Check also whether any third-party consents are required on the sale of the business.
- Debt – If the company has any secured bank debt, collate all the paperwork so you can provide it to the buyer for its review. Bank cooperation will be needed if the buyer either wishes to keep the bank facility or if the facility needs to be removed at the point of completion.
- Employees – Check that all staff have signed and dated employment contracts and all required employee manuals and policies are in place.
- Intellectual Property – Identify key pieces of intellectual property owned or used by the company (e.g. domain names, logos etc.). Ensure documents are in place to verify either the company’s ownership of the intellectual property or its right to use it.
- Premises – Collate all documents necessary to verify title to the premises out of which the business operates. If any alterations have been carried out, ensure any permissions needed were obtained.
- Insurance – Ensure that all necessary policies are in place and all premiums have been paid. Gather copies of all policies, insurance certificates and details of recent claims.
- Confidentiality – Keep discussions around a sale restricted to the smallest number of people possible.
- Advisers – Appointing experienced financial and legal advisers from the very beginning will make the sales process less daunting and run smoother. It will save time and money in the long run.