How Much Tax Will You Pay When You Sell Your Business?
If you are – or have been thinking about selling your business, there are a couple of very important points to consider. A recent change in tax relief for entrepreneurs means that you could lose out on a major slice of the value that you have created.
From 2008, when selling your business, you would typically get Entrepreneurs Relief, which means you would have paid a reduced tax rate of 10% on the sales value. So, sell your business for £1m, and you would pay only £100k in tax, keeping £900k in your pocket.
With a target focused on the Baby Boomer generation, where 70% of businesses are owned by people who are over the age of 55 years old, this generation could lose significant value and personal wealth. Instead of paying £100k per £1 million of sale value, this tax could be set at standard Capital Gains Tax levels, meaning you’d pay £450k instead, so you only get £550k in your pocket, – that’s a £350k loss for each £1 million of sales value !
With the proposed UK government plan to revise Entrepreneurs Relief, meaning it will most likely remove it, this could mean you end up paying CGT at 45%, – or higher.
This possible move is further highlighted by a recent Business Sales Report article…. [11th March 2020]
In the Budget 2020, Chancellor Rishi Sunak has announced that the lifetime limit of Entrepreneurs’ Relief tax will be cut from £10 million to £1 million.
Sunak said that he had reviewed the tax and heard representation, including from the Institute of Fiscal Studies (IFS), recommending that it be abolished. However, the Chancellor said that he wanted the UK to be “risk-taking”, and that ER would be reduced rather than abolished.
While the Chancellor asserted that 80 per cent of entrepreneurs looking to sell their business would be unaffected, rumours that the relief would be cut or abolished had already led to criticism from business owners.
Despite criticism, many see Entrepreneurs Relief as a tax that rewards success, with Rachel Nutt of MacIntyre Hudson saying that the £10 million lifetime gains provided a “a valued incentive for entrepreneurs wanting to grow their business.”
Nutt went on to say that the tax was “of great benefit to small entrepreneurial business owners”.
In a letter to the Chancellor signed by over 150 business owners, Baron Howard Leigh said that entrepreneurs could look to relocate should the tax relief be cut and that such a decision would also impact entrepreneurs’ decisions to start new businesses.
By cutting the tax, it is thought the Chancellor will disincentivise entrepreneurs from selling their business, with many having set up businesses and paid tax and National Insurance on the basis that proceeds from a sale could fund their retirement.
BSR was a co-signatory of a letter, alongside other 150 entrepreneurs from the E2E community, addressed to the chancellor, addressing problems that would arise if Entrepreneurs Relief was to be abolished.
Eddie Bines, Director, Restructuring Advisory, Duff & Phelps, commented on the announcement: “The Conservatives pledged to review and reform Entrepreneurs’ Relief as part of their recent election manifesto, saying that the scheme hasn’t ‘fully delivered on its objectives.’ It was originally intended to encourage owner-managers to invest more in their businesses, but evidence suggests this has not had the desired effect. Coupled with the cost to the Treasury you can see why the Chancellor has had his eye on it.”
“The Chancellor’s changes include raising the applicable 10 per cent capital gains tax rate or reducing the £10 million lifetime limit down to £1 million. These changes could be effective from as early as 6 April 2020.”
“The changes to this tax relief could be a significant blow to business owners and will come at the expense of the UK entrepreneurial community. Furthermore, these sweeping changes to the relief at this time would harm many business owners’ exit and retirement planning. The availability of ER would be at the heart of that.”
“We would encourage owner-managers to contemplate whether it is appropriate to accelerate exit and retirement strategies and potentially lock in the 10 per cent tax rate before it is too late,” Bines continued.
So with an increasing number of businesses up for sale, due to the glut of pending Baby Boomer exits, and the proposed cut to Entrepreneurs Tax Relief at exit, – there would seem to be a driving logic to take action now and secure the maximum benefit from the business sale.
If you are considering an exit, or need support in the process, then feel free to get in touch and we can discuss the best way forward.