Capital Gains Tax Rise: What Could It Mean for UK Business Owners?
Could a Capital Gains Tax rise make it more expensive to sell your business?
There are growing rumours that the UK could increase Capital Gains Tax (CGT) again.
For business owners, this matters.
If you’ve spent 10, 20 or even 30 years building a company, the eventual sale of that business could be the point where you finally realise the wealth you’ve created.
But if Capital Gains Tax rises, more of that wealth could go to HMRC.
The current headline Capital Gains Tax rates discussed in this video are 18% for the lower rate and 24% for the higher rate. There have also already been changes to the Capital Gains Tax annual exemption, Business Asset Disposal Relief and Employee Ownership Trusts.
So, what could another Capital Gains Tax rise mean for entrepreneurs and business owners?
Why is Capital Gains Tax important when selling a business?
For many entrepreneurs, selling their business is what is sometimes described as a “liquidity day”.
You’ve spent years building the company, employing people, generating revenue and growing its value. Eventually, you decide to sell your shares and turn that business value into cash.
That money might then be used for:
Retirement
Starting another business
Investing
Passing wealth to the next generation
Funding the next stage of your life
The amount of Capital Gains Tax payable when you sell can therefore have a significant impact on how much you actually keep.
And this is why the prospect of a Capital Gains Tax rise is particularly relevant to business owners.
What are the current Capital Gains Tax rates?
The headline CGT rates discussed in the video are currently:
18% at the lower rate
24% at the higher rate
These rates are already significantly higher than the Capital Gains Tax rates many entrepreneurs have become accustomed to when planning a business exit.
There are also specific reliefs available in certain circumstances, including Business Asset Disposal Relief.
However, these reliefs have themselves changed significantly.
Capital Gains Tax annual exemption has fallen from £12,300 to £3,000
One of the major changes to Capital Gains Tax has been the reduction in the annual exemption.
Previously, individuals could make up to £12,300 of capital gains before Capital Gains Tax became payable under the annual exemption.
That figure is now just £3,000.
That’s a reduction of £9,300.
While £3,000 might sound relatively small in the context of selling a business, the reduction demonstrates how the tax treatment of capital gains has already changed.
And this is happening alongside changes to the rates and business-specific reliefs.
Business Asset Disposal Relief: from 10% to 18%
For entrepreneurs, Business Asset Disposal Relief (BADR) is particularly important.
You may still hear this referred to as Entrepreneurs’ Relief.
The relief was designed to provide qualifying business owners with a lower Capital Gains Tax rate when they sold their businesses.
Previously, qualifying gains could be taxed at 10%, with the lifetime allowance having previously been as high as £10 million.
That lifetime allowance was reduced to £1 million.
The rate has also increased from 10% to 18%.
For an entrepreneur who has spent decades building a company, that difference can have a significant impact on the amount of money left after a sale.
Why does this matter?
The argument presented in the video is that tax rates can influence whether entrepreneurs choose to build, sell or continue businesses.
If the tax cost of selling becomes too high, some business owners could decide not to sell at all.
Others may look at alternative ways of transferring the business.
And some may consider leaving the UK before selling their shares.
Could higher Capital Gains Tax affect UK businesses?
This is where the potential impact goes beyond the individual business owner.
A business isn’t just an asset owned by one person.
It can also employ staff, pay suppliers and generate tax revenues.
The video highlights several taxes and costs associated with businesses, including:
Employer National Insurance
Business rates
Benefit-in-kind taxes
VAT
Other business taxes
If an owner decides that selling or continuing the business is no longer attractive, there could potentially be consequences for all of these areas.
The argument is that if businesses close instead of being sold or passed on, the economy could lose the wider economic activity those businesses generate.
What happens if business owners stop selling their companies?
A major concern raised in the video is business continuity.
Imagine someone has spent decades building a successful company.
They’re ready to retire and want to sell.
But the tax cost of doing so has increased substantially.
They may then consider whether selling is still worthwhile.
If the business isn’t sold or transferred, there are several possible outcomes. The owner could continue running it, transfer it to someone else, close it or potentially move elsewhere before selling.
The concern is that if more businesses disappear rather than being transferred to new owners, the UK could lose established companies, jobs, knowledge and experience.
The impact on younger workers
Business succession also affects the next generation.
Established businesses provide employment and opportunities for younger people to develop their skills.
The video argues that if fewer businesses are being passed on and continued, there could be fewer opportunities for the next generation of workers and entrepreneurs.
This becomes particularly relevant as wealth and businesses transfer between generations.
The UK’s “big transfer of wealth”
The video refers to the baby boomer generation, generally describing people born between the 1940s and 1960s.
Many people from this generation have spent decades building businesses and accumulating assets.
As they reach the stage of retirement and succession, a significant amount of wealth and business ownership could be transferred to the next generation.
This makes the tax treatment of business sales and transfers particularly important.
If business owners decide that the tax cost is too high, they may reconsider how they transfer their companies.
The potential consequences therefore extend beyond Capital Gains Tax itself.
Employee Ownership Trusts and Capital Gains Tax
Another option for business owners is an Employee Ownership Trust (EOT).
An EOT allows a qualifying business to be transferred to its employees, subject to specific conditions.
Previously, qualifying transfers could benefit from 0% Capital Gains Tax.
The video explains that one of the requirements was that employees gained at least 51% control of the company.
That tax treatment has since changed.
The rate discussed in the video is now 12%.
This means another potential route for business succession has become more expensive from a Capital Gains Tax perspective.
For an owner who wants to retire while keeping the business operating and preserving its existing workforce, the tax implications of an EOT could therefore be an important consideration.
Capital Gains Tax in the UK vs the UAE
The UK isn’t operating in isolation.
Entrepreneurs can compare the UK’s tax environment with other countries and jurisdictions.
The video specifically highlights the UAE and Dubai, where the Capital Gains Tax rate discussed is 0%.
This comparison is relevant because entrepreneurs who have built valuable businesses can consider where they want to live and where they want to realise the value of their assets.
If the tax difference between jurisdictions becomes large enough, it could influence decisions around relocation and business exits.
For the UK, that raises a broader question: how does the tax system affect the incentives for entrepreneurs to build and eventually sell businesses here?
Could a Capital Gains Tax rise change business exit decisions?
For a business owner, the headline CGT rate is only one part of the calculation.
You also need to consider:
The size of the gain
The Capital Gains Tax annual exemption
Business Asset Disposal Relief
The structure of the business
How the business is transferred
Whether an Employee Ownership Trust is involved
Where the business owner is resident when the sale takes place
Changes to any of these areas could affect the amount of tax payable when a business is sold.
This is why rumours of another Capital Gains Tax rise are worth paying attention to if you’re a business owner considering an eventual exit.
What could a Capital Gains Tax rise mean for entrepreneurs?
The exact impact would depend on what changes are eventually introduced.
However, the issues raised in the video can be summarised around three areas.
1. Selling a business could become more expensive
A higher CGT rate could mean business owners retain less of the proceeds from selling their shares.
2. Business succession could become more complicated
Changes to Capital Gains Tax reliefs could affect decisions around passing businesses to employees or the next generation.
3. Entrepreneurs may consider other jurisdictions
The video highlights the UAE and Dubai as examples of jurisdictions with a 0% Capital Gains Tax rate, potentially making location an important consideration for entrepreneurs.
What should business owners do now?
There is already a lot of speculation around Capital Gains Tax rises, but business owners shouldn’t make major decisions based purely on rumours.
What is clear is that the Capital Gains Tax landscape has already changed.
The annual exemption has fallen from £12,300 to £3,000.
Business Asset Disposal Relief has changed, including the increase from 10% to 18% discussed above.
The lifetime allowance associated with the relief has also been reduced from £10 million to £1 million.
Employee Ownership Trusts have also seen changes to their Capital Gains Tax treatment.
If you’re building a business with the intention of eventually selling it, these rules should form part of your long-term planning.
Capital Gains Tax Rise: the key takeaway
A potential Capital Gains Tax rise could have implications far beyond the amount of tax paid on an individual business sale.
For entrepreneurs, Capital Gains Tax can affect the economics of building, selling and transferring a company.
At the same time, business sales and succession can affect employees, future entrepreneurs and the wider economy.
With CGT rates, allowances and reliefs already having changed, business owners should keep a close eye on any further developments.
If you’re considering selling your business, transferring it to employees or planning your long-term exit strategy, understanding the current Capital Gains Tax rules is an important part of that process.
The rules can change. Your business planning shouldn’t be based on rumours. Make sure you understand the tax implications before making major decisions about your business.
