Business Owners Accelerate Exit Strategies Amid Potential Tax Hikes: What You Need to Know Before the Budget
As the UK Budget approaches in just a few days, many business owners are evaluating their strategies in light of potential changes to capital gains tax (CGT) and other fiscal measures. A recent survey by Evelyn Partners revealed that nearly 29% of business owners have already accelerated their plans to sell, with a significant portion driven by concerns over tax hikes.
However, the prospect of tax changes shouldn’t lead to rushed decision-making. While it’s important to stay informed and prepared, it’s equally important to adopt a measured approach to ensure any action taken aligns with your long-term business goals. In this blog, we’ll explore why tax concerns are influencing exit strategies and what you should consider as the Budget looms.
Why Are Business Owners Rethinking Their Exit Plans?
Business owners are frequently faced with decisions about the right time to sell. While market conditions, financial performance, and personal circumstances typically drive these decisions, looming tax changes have added an extra layer of complexity.
1. Potential Increases in Capital Gains Tax
CGT is a crucial factor for business owners when selling their company, especially for those relying on Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief), which reduces the CGT rate on qualifying gains to 10%. However, with the Budget just around the corner, speculation is rife that this relief could be reduced or abolished, or that CGT rates may rise more generally.
While no one can predict the specifics, the possibility of an increased CGT rate means business owners should assess how this could affect their plans. If selling is part of your long-term strategy, understanding how a tax change could impact your eventual exit value is key. That said, a thoughtful, strategic sale is always preferable to one motivated purely by short-term tax concerns.
2. Political and Economic Uncertainty
Periods of uncertainty, like the lead-up to a Budget announcement, often prompt business owners to re-evaluate their exit timelines. The anticipation of significant tax policy changes, including CGT, can lead to pre-emptive action. However, while many are accelerating their plans, it’s important to focus on ensuring your business is optimised for sale, rather than rushing to exit at any cost.
Being prepared to sell when the time is right, with a solid understanding of market conditions and the potential tax environment, will always be a more sustainable approach than reacting to external pressures.
3. Navigating a Post-Budget Environment
Regardless of whether CGT rises or stays the same, business owners face broader challenges such as inflation, changing interest rates, and shifting market dynamics. These factors all influence business valuations and the terms of any future sale.
As such, the focus should be on ensuring your business is in the strongest possible position to weather these external factors, while considering any potential tax increases as part of the bigger picture. If the Budget brings significant changes, being prepared with a clear, long-term strategy will help you navigate the post-Budget environment with confidence.
How Should SME Business Owners Respond?
For SME owners concerned about potential tax increases, now is the time to review your plans carefully. Here’s how to approach it:
1. Evaluate Your Business Readiness for a Sale
Whether you’re planning to sell soon or years down the line, it’s a good idea to periodically assess your business’s readiness for sale. This means reviewing your financials, management structure, and operational processes to ensure that when you do decide to sell, your business is in peak condition. This not only maximises your valuation but also gives you the flexibility to sell when the timing is right, rather than rushing due to external pressures.
2. Seek Professional Financial Advice
The tax landscape is always evolving, and with potential changes to CGT on the horizon, it’s critical to seek expert advice. A corporate finance advisor, such as Branta, can help you navigate these complexities and provide guidance on when and how to act. This might include exploring alternative routes, such as partial sales, raising equity, or refinancing, that allow you to secure liquidity without fully exiting your business right away.
3. Consider Your Timing
Timing is crucial when selling a business. While many owners are rethinking their exit timelines in light of the impending Budget, it’s important to remember that a well-prepared, strategic sale is always preferable to one that’s rushed. Even if tax rates do increase, carefully planning your sale to maximise value and take advantage of current reliefs is often the better option.
4. Maximise the Use of Tax Reliefs
Even if CGT rates rise, business owners should ensure they’re taking full advantage of current reliefs, such as Business Asset Disposal Relief. If the Budget introduces changes to these reliefs, understanding how to optimise their use under the existing rules could mitigate some of the potential tax burden. Working with a tax advisor can help you identify the best ways to minimise your tax liability and maximise the value you receive from a sale.
Post-Budget: What to Watch For
Once the Budget has been announced, it’s critical to review any changes with your professional advisors to understand their impact. Key areas to watch include:
- Capital Gains Tax Rates
Any rise in CGT rates could significantly affect the profit you take from selling your business. While some may choose to act before the new rates come into effect, it’s essential to consider this in the context of a broader, strategic decision. Rushing into a sale to avoid a tax hike might result in a lower overall valuation.
- Changes to Business Asset Disposal Relief
If Business Asset Disposal Relief is restricted or capped, business owners could face higher tax bills. While this might prompt some to accelerate their plans, a strategic review of your business’s readiness for sale is still critical. Being prepared to adapt to new rules will help you make better long-term decisions.
- Increases to Employers’ National Insurance Contributions
There’s also speculation that employers’ National Insurance (NI) contributions could rise. An increase in these contributions would raise operating costs, impacting profitability. For SME owners, even small cost increases can have a noticeable effect on overall profit margins, which are crucial when it comes to calculating your business’s value. Higher NI contributions could reduce valuation multiples, making it essential to plan accordingly if these changes are introduced.
- New Incentives or Penalties
The government may also introduce new tax incentives or penalties that affect business owners. It’s important to stay informed on all Budget measures, as they may present new opportunities or challenges for your business.
Self-Test:
Before making any major decisions, ask yourself the following questions to ensure your business is prepared:
- Have you recently reviewed the current value of your business in light of potential tax changes?
- Do you have a long-term exit strategy that considers possible shifts in capital gains tax or National Insurance contributions?
- Are you taking steps to increase your business’s value, even in the short term?
- Have you sought advice from a corporate finance advisor about your options and strategies in a post-Budget landscape?
Conclusion:
With the Budget just days away, now is the ideal time to review your business exit strategy. While there’s no need to rush into any decisions, being prepared for potential changes to capital gains tax, National Insurance contributions, and other fiscal measures is key to safeguarding your business’s value. By staying informed and seeking professional advice, you can ensure that you’re ready for whatever the Budget brings and positioned for success in the future.
