New Government,

New Taxes!

What could this mean for your business?

How can Shilling Help…?

Shilling are very active in seeking acquisitions both for ourselves and our partners. As all our offers are backed by funding and our procedures are well practiced, we can be very fast and efficient in reaching a successful completion of any acquisition.  

The election of a large Labour majority government and their specific refusal to exclude Capital Gains Tax increases from their manifesto and interviews indicates a potentially significant change in circumstances that can materially impact any business owner’s income and retirement plans for many years to come.

Please see What could it mean for my business….? that covers the possible implications in some detail.

In short, we believe that the next Budget will hugely increase the tax rates on business sales.

We also expect that the Budget will be held in October of this year giving us a very narrow window to agree and execute any acquisitions before the sale proceeds are exposed to the new taxation risks.

If you are interested in beating this possible tax trap, Shilling are uniquely placed to get things done before the tax hammer can fall.

Ask us about ‘Sell and Stay’ a we can also explore the option of us acquiring your business to release your capital but with you staying on to run it for the next several years.

If you would like to benefit from beating such tax rises, please open a conversation with us now.

What could it mean for my business….?

The Labour election manifesto does not rule out any increases to Capital Gains Tax and widely available financial and political analysis suggests the likely tax risks to be as follows:

Business Asset Disposal Relief (formerly Entrepreneur’s Relief) – As you know, when you sell your business, you pay tax on the proceeds as a capital gain. We specifically structure our offers to help the Seller claim Business Asset Disposal Relief against this capital gain. In practice this means each selling shareholder only pays 10% in tax on the first £1 million of the purchase consideration and 20% on any sums over this.

The risk – Up to 10 March 2020, Business Asset Disposal Relief could be claimed on amounts up to £10 million before being reduced to £1 million from 11 March 2020. It is widely expected that this relief will be removed entirely in the next Budget making all the sale proceeds subject to a 20% rate.

Capital Gains Tax – Throughout the election campaign, Labour specifically refused to rule out increasing Capital Gains Tax or Inheritance Tax. This strongly suggests that both will be the first taxes to be increased in the next Budget.

The risk – It may be that a simple tax increase will be applied or, more concerningly, there is the risk of “harmonisation”. It has long been an objective of HMRC to “harmonise” Capital Gains Tax with Income Tax. In this instance, the tax on the sale of shares would be calculated as follows:

Basic rate: 20% – £12,571 to £50,270

Higher rate: 40% – £50,271 to £125,140

Additional rate: 45% – Over £125,140

Note – The above table does not consider the effective 60% tax liability as earnings cross £100,000. For simplicity, we have also excluded it form the tax examples below.

The Budget – Chancellor Rachel Reeves has said the date for the UK Government’s first Budget will be announced before Parliament’s summer recess on 31 July 2024. The OBR report that the new Chancellor is expected to require before the Budget can be delivered will not be available until 13 September. Given that The Labour Party Conference takes place from 22 to 25 September it is widely expected that the next Budget will be in early October.

Tax Examples

Example 1: £500,000 Purchase Consideration

Currently a £500,000 purchase consideration is taxed at 10%, (£50,000 in tax) leaving the Seller with a “take home” sum of £450,000.

If Business Asset Disposal Relief is lost this will mean the Seller will be taxed at 20% Capital Gains Tax (£100,000 in tax) giving a “take home” of £400,000.

If harmonisation occurs, various tax bands would combine totalling £206,174 reducing the Sellers “take home” to only £293,826.

Example 2: £1,000,000 Purchase Consideration

Currently a £1,000,000 purchase consideration is taxed at 10%, (£100,000 in tax) leaving the Seller with a “take home” sum of £900,000.

If Business Asset Disposal Relief is lost this will mean the Seller will be taxed at 20% Capital Gains Tax (£200,000 in tax) giving a “take home” of £800,000.

If harmonisation occurs, various tax bands would combine totalling £431,174 reducing the Sellers “take home” to only £568,826.

Dividends

Many business owners draw a reduced salary via the PAYE scheme with the shortfall on their income made up from dividends. We believe there is also a very real risk that these arrangements could be impacted in the upcoming budget.  Over the last few years, the dividend allowance has been gradually reduced and if the tax on dividends is also harmonised there will be significant reductions in owner/managers “take home” pay.