One in three business owners is ramping up sales as a capital gains heist looms

Entrepreneurs are putting forward their exit strategies in anticipation of the government staging a capital gains attack on the budget.

A study by asset manager Evelyn Partners shows that 29 percent of entrepreneurs have accelerated their exit plans, compared to 23 percent eighteen months ago.

The government has ruled out an increase in the main corporate rate above 25 percent and promised to freeze the nominal rates of income tax, national insurance and VAT.

However, the Prime Minister warned that the Budget on October 30 will be ‘painful’ and remains wary of any changes to capital gains tax (CGT) or inheritance tax (IHT).

Currently, CGT rates are significantly lower than income tax rates, with basic rate taxpayers paying 10 percent on most profits and 18 percent on residential property.

There has been speculation that Rachel Reeves would try to bring CGT in line with income tax rates, which could see some people taxed as much as 45 per cent on their profits.

Business Asset Disposal Relief, formerly Entrepreneurs’ Relief, can also be considered, which allows business owners to pay a reduced rate of CGT on profits up to £1m.

As a result, business owners are taking matters into their own hands by rushing to sell ahead of any expected changes to avoid paying higher taxes.

Nearly a quarter of respondents with a turnover of more than £5 million have accelerated their plans due to concerns about capital gains tax (CGT).

Another 20 percent have put forward plans in the past 12 months in anticipation of possible inheritance tax cuts.

Laura Hayward, tax partner at Evelyn Partners said: ‘As polls increasingly suggested a change in government and the resulting potential for tax changes became increasingly likely, more and more business owners have contacted us to discuss business exits.’

David Goodfellow, head of UK financial planning at Cannacord Genuity, told This is Money that he had more clients inquiring about CGT for both business and property transactions. Others sat ‘on their hands’.

“I suspect we’re seeing customers who have made a decision or are about to make a decision about finding a buyer… they’ve accelerated that.

“We all know that the timeline involved in any of these decisions is less within our control. You have to find a buyer and there is usually a fair amount of administration, legal work and negotiations to be done.

‘While I’m not making a prediction that there will be a change, I think it’s fairly certain that CGT won’t be lower, so why not go ahead with a trade and hopefully the same level of CGT?’

He also warned that any ‘punitive’ tax would have an effect on the wider business landscape as more people would be discouraged from selling or taking risks.

“Weakening the attractive tax benefits that entrepreneurs have seen in the past, or increasing taxes on people who have taken risks, will be disincentive.”

In addition to the impending budget, there are other factors that play a role. A quarter of entrepreneurs say they have brought forward their exit to access the capital tied up in their business.

Another 24 percent said they are looking to sell because the cost of accessing capital has risen due to rising interest rates.

Hayward said: ‘The business environment for many owners has been tough enough in recent years as they have worked hard to rebuild their businesses after the pandemic, against a backdrop of cost-of-living pressures and high inflation.

‘Add to this the potential for adverse tax changes in the coming Budget and it is entirely understandable that some will hope to realize the benefits of their successes sooner rather than later.’

While some business owners may reconsider their exit strategy to avoid higher taxes, this comes with some risk.

Any sale motivated by tax concerns will likely take some of the shine off the sale, weakening the price.

Goodfellow says, “To be clear, if a client says, do you think I should sell my business because taxes are going to rise, my answer is no. Because you don’t know that taxes are going up.

‘You should not take action based on speculation about what may or may not happen in the future. That’s always the wrong reason.’