Entrepreneurs who sell up after the capital gains tax increase being mooted by Rishi Sunak could find themselves paying more than double current CGT.
Accountancy firm Kreston Reeves has calculated that an entrepreneur selling a business worth £5m could pay up to £2.25m in CGT if the chancellor matches CGT rates to those of income tax, as mooted. Under current CGT rates, they may only pay £900,000.
Chancellor Rishi Sunak asked the Office of Tax Simplification, an independent statutory body, to carry out a review of capital gains tax. In November, it published its recommendations, including increasing CGT rates to match those of income tax.
Andrew Wallis, corporate tax partner at accountants Kreston Reeves, said: “There’s a feeling that with public finances being hit by Covid, reforming CGT would be a fair step to raise revenue. Why is there a distinction between capital and income? There’s a potential argument to say the two should be treated the same.
“Another point is that it’s the OTS and not the chancellor that has come up with this idea, so that gives him some political cover if he does harmonise income tax and CGT rates.”
If enacted, the changes would mean higher taxes on share sales for business owners. CGT is charged on gains at 10 per cent for basic rate taxpayers and 20 per cent for higher and additional rate taxpayers. Income tax is charged at a basic rate of 20 per cent, rising to 40 per cent and 45 per cent for higher and additional taxpayers.
The chancellor has been searching for ways to fill the chasm in public finances due to Covid-19. Bringing CGT and income tax into alignment could raise up to £14bn for the Treasury, according to an estimate by HM Revenue & Customs cited by the OTS.
However, the question the chancellor will be wrestling with is whether increasing CGT to mend a small hole in ripped public finances is the right thing to do at a time when entrepreneurs have been so badly hit.
The OTS review also questioned the effectiveness of entrepreneurs’ relief — recently renamed “business asset disposal relief”. The policy allows business founders selling their company to pay CGT at a lower rate of 10 per cent up to a lifetime limit of £1m – which was reduced from £10m in March 2020.
How to sell your company before any CGT hike in April
Accountants and others have reported increased interest from entrepreneurs looking to sell their businesses before any CGT hike is introduced in April 2021.
Jack Clipsham, corporate finance partner at Kreston Reeves, said that although his firm has seen growing numbers of entrepreneurs inquiring about timings for company sales, there is not much time left – even if you began the sales process now.
Clipsham said: “One route would be for an entrepreneur to go for an accelerated sale, a route more commonly used if the business is distressed. This could, however, have a negative impact on value.”
Wallis added: “The tax tail should never wag the dog but if someone is thinking of selling their business, then accelerating it now ahead of any potential CGT change may make commercial sense.”
Clipsham points out that a sale may not be the best route for all businesses at this time. Taking, for example, a management team of a high-growth company growing at a rate of between 10 per cent and 15 per cent per annum. “Over a three- or five-year window, even with the higher rates of CGT, the consideration achieved would justify waiting,” said Clipsham,
#1 – Use specialist advisers
If you need to do a deal before April, you need specialist advisers who know what they’re doing and understand the time restraints.
#2 – Get all your documentation complete
Once Heads of Terms have been signed, the buyer will undertake detailed due diligence (legal, financial and commercial). To prevent delays in the process you should ensure that all information they are likely to request is readily available, complete and in order.
#3 – Explore using insurance
One of the biggest issues around any company sale and the negotiation of the SPA are warranties and indemnities. Significant time can be lost in complex wording negotiations between lawyers if there is insufficient disclosure. Strong disclosure, supported by documentation, can reduce the need for indemnities and warranties. If this is not possible, it’s worth exploring warranties and indemnity insurance as one way to avoid getting bogged down in such negotiations.
#4 – Have realistic expectations
Business owners need to be available and prompt when answering questions from accountants and lawyers. They need to be aware of what the advisers need to do to facilitate completion and understand the time pressure their advisers are under, just to get the deal complete on time. They must be available to respond to queries, but must also ensure the day to day running of the business is not affected and it does not drop during this period.
#5 – Earnouts and future considerations
Consider in negotiations the impact of earnouts and deferred consideration which can change the timing of the CGT tax points.