By Rich Grover, director, Hazlewoods  

As a business owner, timing your exit can significantly impact your financial future. With the new government rumoured to be weighing up an increase in capital gains tax (CGT), many founders are choosing to exit now to secure the current, favourable rates of CGT.

Understanding the implications of a future tax change and acting swiftly could save a substantial amount of money. Here's why many business owners are choosing to sell now, before the government implements any changes.

The impact of CGT

CGT is levied on the profit realised from the sale of assets, including businesses. When you sell your business, the difference between the sale price and your purchase price (often nominal in the case of founders) constitutes your capital gain. This gain is subject to taxation at a rate determined by the prevailing CGT laws.

Proposed changes in CGT

Given that the Labour government has given commitments not to raise income tax, national insurance or VAT levels, Chancellor Rachel Reeves is weighing up plans to increase other taxes, including the CGT rate, potentially aligning it more closely with income tax rates. Currently, CGT rates are lower than income tax rates, providing a financial incentive for business owners to sell assets and realise gains. However, with potential reforms on the horizon, this tax advantage could diminish or disappear entirely. An Autumn Budget has been announced for October 30.

Financial implications of selling now

Selling your business before any CGT increase could result in significant tax savings. The example set out below is for illustrative purposes only - not including various annual exemptions.

Market conditions

There is an active market of prospective acquirers. Private equity houses have significant funds they need to deploy to generate returns for their investors, and trade acquirers are seeking to consolidate market share. Current market conditions are favourable, with many sectors experiencing robust demand and attractive valuations. Acting now allows you to capitalise on these conditions, maximising your sale price.

Certainty in financial planning

Another benefit of selling your business ahead of any CGT hike is that it provides certainty in financial planning. Knowing your tax liability allows you to plan for retirement, reinvestment or pursue new ventures with confidence. Postponing the sale introduces uncertainty and potential financial strain, complicating your future plans.

The role of professional advice

Navigating the sale of a business is complex, requiring expertise in valuation, negotiation and tax planning. Engaging with corporate finance advisers and legal professionals early on can ensure you optimise the sale process and mitigate tax liabilities. These professionals can help structure the sale in a tax-efficient manner, safeguarding your interests and maximising your returns.

Conclusion

The prospect of increased CGT presents a compelling case for selling your business sooner rather than later. By acting now, you can take advantage of current tax rates, favourable market conditions, and the certainty it brings to your financial planning. Delaying the sale could result in significantly higher tax liabilities, reducing your net proceeds and impacting your financial future.

However, any decision to sell should not be driven purely by tax, but by it being the right time, commercially and personally, to do so. Consulting with professional advisers will further enhance your decision-making process, ensuring you achieve the best possible outcome.

To discuss this topic in more detail with a member of our specialist corporate finance team, call 01242 680000, email rich.grover@hazlewoods.co.uk or go to https://www.hazlewoods.co.uk/expertise/for-business/corporate-finance-deals/.