The October 2024 Labour budget introduced significant changes to the UK tax landscape, particularly for business owners planning an exit. Increased capital gains tax (CGT) rates, revised relief thresholds, and stricter compliance measures mean that careful tax planning is now more critical than ever. For entrepreneurs aiming to maximise their proceeds and minimise liabilities, understanding the implications of these changes is essential.
In this blog, we outline seven key tax considerations for business owners looking to exit in this new environment and how to position your business for a tax-efficient sale.
1. Understand the New Capital Gains Tax Rates
The Labour government’s budget raised the upper capital gains tax rate, which can significantly impact the proceeds from the sale of a business. Entrepreneurs in higher tax brackets now face steeper liabilities when cashing out.
What You Can Do:
Work with a tax advisor to calculate the impact of the new CGT rates on your sale proceeds.
Explore strategies like spreading proceeds through deferred payments or earn-outs to avoid a large tax bill in a single year.
Consider tax-efficient reliefs such as Business Asset Disposal Relief (BADR) to reduce your CGT liability where eligible.
2. Maximise Business Asset Disposal Relief (BADR)
Previously known as Entrepreneurs’ Relief, BADR offers a reduced 10% CGT rate on qualifying business disposals. However, recent changes have tightened eligibility criteria and reduced the relief threshold, limiting its benefits.
What You Can Do:
Ensure you meet the criteria for BADR, including ownership and operational requirements.
Plan your sale carefully to optimise your eligibility, particularly if you’re considering selling shares or transferring ownership to family members.
3. Consider Employee Ownership Trusts (EOTs)
Employee Ownership Trusts (EOTs) are becoming an increasingly popular exit option due to their significant tax benefits. Under current rules, selling your business to an EOT can allow you to avoid CGT altogether, provided certain conditions are met.
What You Can Do:
Assess whether your business is suitable for an EOT sale.
Work with advisors to structure the transition while ensuring the interests of employees and stakeholders are protected.
4. Plan for Dividend Taxation
If part of your exit strategy involves paying dividends to shareholders, the new budget has likely increased the associated tax burden.
What You Can Do:
Evaluate whether to distribute dividends before the sale or to structure payments post-sale to align with lower tax brackets.
Discuss dividend timing and structure with your financial advisor to optimise tax efficiency.
5. Leverage Pension Contributions
One effective way to reduce taxable income from the sale is by making pension contributions. This not only minimises your tax liability but also secures your long-term financial future.
What You Can Do:
Work with a financial planner to calculate the maximum allowable pension contributions under current rules.
Incorporate pension planning into your overall exit strategy to optimise tax efficiency.
6. Navigate Inheritance Tax (IHT) Implications
For business owners passing on their business to family members, the new tax environment may have implications for inheritance tax planning.
What You Can Do:
Review your estate planning strategy to ensure the smooth transfer of business assets while minimising IHT exposure.
Consider Business Property Relief (BPR) to reduce the value of qualifying business assets for IHT purposes.
7. Prepare for Increased HMRC Scrutiny
The Labour budget also allocated more resources to HMRC, signalling an increase in audits and compliance checks. Business sales are likely to face greater scrutiny, particularly around valuations and tax structuring.
What You Can Do:
Conduct a pre-sale tax audit to ensure compliance with all relevant regulations.
Keep thorough records of financials, contracts, and any tax relief claims to avoid disputes during HMRC reviews.
Work with experienced legal and tax advisors to navigate complex compliance requirements.
Bonus Tip: Engage Professional Advisors Early
Tax-efficient exit planning is a complex process that requires input from experienced advisors, including tax specialists, corporate finance experts, and legal professionals. Early engagement ensures that you have the time and expertise to optimise your strategy and avoid last-minute surprises.
Final Thoughts
The October 2024 Labour budget has introduced a challenging tax environment for business owners planning to exit. However, with careful planning and strategic decision-making, it’s still possible to achieve a successful, tax-efficient sale.
Start by understanding the tax changes and how they apply to your business. Then, work with advisors to explore reliefs, optimise your sale structure, and minimise liabilities. Selling a business is one of the most significant financial decisions an entrepreneur will make; by planning ahead, you can protect your hard-earned value and secure the future you envision.
The key to success lies in being proactive, informed, and prepared for the complexities of the new tax regime.
Get in touch with the Chalkhill Blue team today on 01793239542 or email us at [email protected]
