Capital Gains Tax Changes 2024: Essential Guide for Founders and Shareholders | Prepare for New CGT Rules
16 October 2024
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Capital Gains Tax and the Impact on Business Owners and Shareholders: How to Prepare for the Autumn Budget 2024
With the Autumn Budget announcement set for October 2024, UK business owners and shareholders are preparing for significant changes to the tax landscape. Anticipated modifications to Capital Gains Tax (CGT) and Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) could have a major impact on those considering selling their businesses or exiting investments.
This blog explores the potential changes to tax reliefs, what they mean for founders and shareholders, and how to navigate this evolving financial landscape with support from Foundy’s expert M&A advisory services.
1. What is Capital Gains Tax (CGT)?
Capital Gains Tax (CGT) is the tax on the profit made when an asset, such as shares or a business, is sold. The current CGT rates are:
10% for basic-rate taxpayers
20% for higher or additional-rate taxpayers
18% for basic-rate taxpayers on residential property
28% for higher-rate taxpayers on residential property
For business owners, CGT becomes particularly relevant when selling shares or ownership stakes. Reliefs like Business Asset Disposal Relief (BADR), formerly Entrepreneurs’ Relief, have historically reduced the tax burden on these transactions. However, potential changes could make it more costly to sell a business.
2. The Evolution of Business Asset Disposal Relief (BADR)
Business Asset Disposal Relief (BADR), previously known as Entrepreneurs’ Relief, has been a crucial tool for business owners looking to reduce their tax liability when exiting a business. However, changes to BADR over the years, and possible further alterations in 2024, mean business owners need to act with urgency.
Below is a table outlining the changes in BADR since its inception:
2008 - Entrepreneurs’ Relief 10% on first £1M
2010 - Entrepreneurs’ Relief 10% on first £5M
2011 - Entrepreneurs’ Relief 10% on first £10M
2020 - Business Asset Disposal Relief (previously called Entrepreneurs Relief) 10% on first £1M
2024/2025 (Proposed) Business Asset Disposal Relief of 30-39% TBD based on policy
What’s Changing?
The government is reportedly considering increasing CGT rates to between 30% and 39%, which would result in a significantly higher tax burden for business owners. This could be a sharp departure from the current 10% rate enjoyed by many under BADR.
3. Implications for UK Business Owners and Shareholders
The potential changes to CGT and BADR have raised concerns across many sectors. Below are key areas where these changes could have an impact:
a. Founders and Entrepreneurs:
Business owners who are planning to exit their companies in the next few years may face higher taxes on their sale proceeds if CGT rises. For entrepreneurs relying on the current 10% BADR rate, the proposed increase to 30-39% could significantly reduce the money they take home from a sale.
b. Tech Startups and Scale-ups:
The tech sector, already facing a challenging investment climate, may find it harder to attract investors due to the potential for higher CGT rates. Founders of tech startups might reconsider their exit strategies, particularly if investment returns for venture capitalists and angel investors are taxed more heavily.
c. Traditional Businesses with Retiring Owners:
Retiring business owners who were banking on selling their businesses and benefiting from BADR may need to rethink their plans. Higher CGT could reduce the overall financial benefit from a sale, affecting retirement plans and succession strategies.
d. Potential Entrepreneur Exodus:
Many UK entrepreneurs are considering moving to more tax-friendly jurisdictions like Dubai, Cyprus, and Switzerland. A survey found that six out of ten business owners would consider relocating abroad to avoid a CGT increase, which could lead to a talent and capital exodus from the UK.
4. Strategies for Maximising Business Value Amid Tax Changes
While the upcoming changes to CGT and BADR present challenges, there are ways to optimise your business value and minimise the tax burden. Here are key strategies for business owners and shareholders:
a. Long-Term Transaction Planning:
Strategic, long-term planning is essential for maximising business value. Foundy’s AI-powered transaction planning services can help develop a growth strategy that aligns with your exit goals, ensuring that you’re well-positioned before potential tax changes take effect.
b. Accelerate Your Exit Before Tax Changes:
If you’re already considering selling your business, now might be the best time to act. By executing a sale before new CGT rates are introduced, you can lock in the current, lower tax rates and protect a larger share of your profits. Foundy’s sell-side advisory services offer tailored solutions to help you navigate immediate sales.
c. Consider Employee Ownership Trusts (EOTs):
For business owners seeking a more tax-efficient exit, Employee Ownership Trusts (EOTs) provide an attractive alternative. EOTs allow business owners to transfer ownership to employees and may offer more favourable tax treatment than direct sales, especially in a higher-CGT environment.
d. Explore Alternative Exit Structures:
Alternative exit strategies, such as Management Buyouts (MBOs) or partial sales to private equity, may offer more flexibility in structuring deals to minimise tax exposure while still extracting value from your business.
e. Utilise Foundy's AI Tools and Expert Advisors:
Foundy’s AI-powered M&A advisory platform offers bespoke solutions for business owners facing the complexities of tax changes. Our expert advisory team can help you explore the best options for your business exit, ensuring that you navigate the evolving tax landscape with confidence.
5. Key Takeaways
Higher CGT Rates on the Horizon:
The Autumn Budget 2024 is expected to introduce CGT increases, potentially as high as 39%. Business owners should start planning now to avoid being caught off-guard.Changes to Business Asset Disposal Relief:
BADR may undergo significant changes, making it less advantageous for entrepreneurs. If you are considering a business sale, it may be wise to expedite the process.Plan for Your Exit Early:
Whether you’re considering a long-term exit or a quick sale, now is the time to start planning to maximise your business’s value in light of the anticipated tax changes.Seek Expert Advisory Support:
Foundy’s M&A advisory services, powered by AI, can help you navigate the complexities of business sales and tax optimisation. Whether you need transaction planning, deal execution, or strategic advice, Foundy is here to support your business.
Considering selling your company in the near or long term? Have a meeting soon to discuss your goals and pain points and receive a free valuation report. Start planning soon to mitigate the risk of leaked value. Learn more via our sellers and buyers website pages.
Conclusion: Navigating the Changing Landscape
The Autumn Budget 2024 is expected to bring significant changes to CGT and Business Asset Disposal Relief, creating challenges for UK business owners and shareholders. To mitigate the impact of these changes, it is essential to act early and strategically.
Foundy’s sell-side services offer tailored, AI-driven solutions to help business owners maximise their exits and minimise tax liabilities. Whether you’re planning a long-term strategy or need immediate deal execution, Foundy is ready to assist you.
FAQs
Q: What is Business Asset Disposal Relief (BADR)?
A: Business Asset Disposal Relief (BADR), formerly Entrepreneurs' Relief, allows business owners to pay a reduced CGT rate of 10% on gains from selling their business, up to £1 million.
Q: How much could CGT rates increase?
A: Reports suggest that CGT rates could increase to between 30% and 39%, significantly higher than the current 20% for higher-rate taxpayers and 10% under BADR.
Q: Should I sell my business now?
A: If you’re considering selling, it may be advantageous to sell before new CGT rates take effect. Acting quickly could allow you to lock in the current, lower tax rates.
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