The government in delivering its Winter Economy Plan on 24 September has left open the window for entrepreneurs looking for an exit from their business, says accountants and business advisers Kreston Reeves.
Rumours had been circulating that Chancellor Rishi Sunak had capital gains tax in his sights with major reforms to be announced in his annual autumn statement. It had been suggested that capital gains could be aligned to income tax, leaving business owners exiting a business facing significant additional tax liabilities.
Jack Clipsham, a Partner and Head of Corporate finance at Kreston Reeves said: “We were expecting changes to capital gains tax to be announced in the autumn statement that could have seen business owners paying up to 45% on the proceeds of a business sale instead of just 20% under the current arrangements.
“That had naturally dampened the appetite of many business owners looking to exit their business at this time. That has now changed. There is now a window for entrepreneurs to exit a business and take advantage of the current capital gains tax rates.”
But, warns Kreston Reeves, that window is unlikely to remain open for long.
“The government will be looking to increase its tax revenues to cover the cost of its COVID support programmes and is likely to address this at the next spending review,” says Jack. “We would expect capital gains tax to again come under the spotlight.”
Entrepreneurs Relief was replaced by the less advantageous Business Assets Disposal Relief in Finance Act 2020, meaning that tax on gains made on a sale of business between £1 million and £10 million doubled. If capital gains tax were to be aligned with income tax, business owners could face more than a further doubling on the tax payable on any gains following a business sale. Capital gains from disposals of up to £1m may still qualify for the reduced rate of 10%.
Jack says: “A business sale should not, of course, be driven solely by tax considerations but by the needs of the business itself and its owners or management teams. However, if a business owner is contemplating an exit, now presents a real window of opportunity.”
And unlike the 2008 crash, there are buyers in the market looking to acquire good businesses, says Kreston Reeves.
Jack explains: “Buyers currently fall into three broad camps. There are still businesses less affected by COVID-19 keen to progress their existing development strategies.
Secondly, there are those businesses that are looking to grow through acquisition and see opportunity in acquiring businesses that may be struggling as a result of the coronavirus pandemic.
“They may try and push valuations down, but we believe those valuations will remain high if the underlying business is strong and with business owners being able to demonstrate a post-COVID recovery plan.
“Thirdly, many private equity investors have significant funds to invest and are actively looking to make investments in strong businesses that wish to grow. Businesses that need investment and with ambitious plans are likely to find investment readily available for appropriate projects.
Jack adds: “Unfortunately, there will be those businesses that will not survive the current pandemic but still retain value in parts of the business. Business owners may be tempted to simply close the business and walk away but could actually realise some value in a well-structured exit if planned appropriately.”
Business owners should seek specialist advice and support if considering a sale or taking investment.