On 30 October 2024, the Chancellor, Rachel Reeves, delivered the Autumn Budget (‘the Budget’). This outlined the Government’s intention to increase spending on public services by an estimated £70 billion, with more than 50% of this investment being funded through taxation. This has created a degree of uncertainty for small business owners across the UK, who may now wonder how their plans for their business will be affected.
In this insight, we will discuss the implications of several headline tax reforms for business owners, focusing on Capital Gains Tax (‘CGT’), Business Asset Disposal Relief (‘BADR’) and Investors’ Relief.
It should also be noted that the Budget included the Corporate Tax Roadmap, which promised to maintain the current 25% cap on the main rate of Corporation Tax while also retaining the small profits rate of 19%. Marginal relief will also be preserved alongside Research and Development reliefs and the capital allowances system.
CGT: What is it and what has changed?
CGT is a tax payable by the individuals on the gain (profit) made on the sale or disposal of various types of property (including shares and other business assets, but excluding your primary residence) and is charged at two rates:
- a higher rate payable by higher and additional rate taxpayers.
The Budget raised the rates at which CGT is charged to 18% for the basic rate and to 24% for the higher rate. These increases came into effect immediately from 30 October 2024.
Individuals have an annual CGT allowance of £3,000, on which CGT is not charged. It is important to remember that this allowance cannot be carried forward, so careful planning is advisable to ensure that it is used effectively and efficiently.
BADR: What is it, and what has changed?
BADR is a relief from CGT available on a lifetime allowance of £1 million of qualifying business assets. BADR is available to individuals on the disposal of:
- their shares in their own company (providing they own a minimum of 5% of the share capital and voting rights for a minimum of 2 years prior to the disposal);
- in the case of a sole trader, their assets.
Currently CGT on the lifetime allowance of £1 million is charged at 10%. However, from 6 April 2025, the rate at which CGT is charged on the allowance will rise to 14% and then from 6 April 2026, this rate will rise to 18%.
Investors’ Relief: What is it and what has changed?
Investors’ Relief is designed to provide CGT relief to individual investors on qualifying investments, which include ordinary shares in an unlisted trading company. It should be noted that the shareholder will not qualify for the relief if they are a paid director or employee of the company at any point while owning the shares. There are only limited circumstances when the individual seeking relief can receive payments from the company.
Like BADR, Investors’ Relief is subject to a lifetime allowance. From 30 October 2024, the lifetime allowance was cut from £10 million to £1 million. The rate at which CGT is charged on the relief will also rise, in line with BADR, to 14% from 6 April 2025 to 18% from 6 April 2026. These rises will mean that the base rate of CGT will apply to both lifetime allowances of BADR and Investors’ Relief.
Considerations for Business Owners
Business owners will be conscious that these increases to CGT and the reduction in BADR will have an impact on any future sales. Business owners considering selling their business as part of their exit strategy may wish to review their plans, especially the timing of any sale.
The increased tax liabilities of the trading company (for example, the increase in NI contributions, which could affect the profitability of certain companies), as well as the additional tax that will be incurred on the sale of the company, will also impact the valuation of the business.
Whilst more traditional exit strategies could involve a sale to a third party or a management buyout (‘MBO’), business owners may also look to alternative ownership structures, such as a sale to an Employee Ownership Trust (‘EOT’) for a more tax-efficient disposal. CGT rates on a sale to an EOT are 0%; therefore, these increases in CGT rates might mean that EOTs are more attractive than traditional exit strategies. Such generous tax relief, while attractive, is not the only consideration when considering an EOT, and it will be important for business owners to consider the following:
- whether the employees are ready for the transition, to ensure the company can sustain or grow its profitability;
- whether the business owner is ready to hand over control of their business to the EOT. While a selling shareholder may continue to work in the business and sit on the board of the EOT and the company, they will not be able to form a majority on the board of the EOT, and the EOT will ultimately control their company.
As always, we recommend seeking specialist tax advice before selling a business to ensure that any deal is structured in a tax-efficient manner and that the transaction will receive the appropriate tax treatment from HMRC.
Call our specialist solicitors on 0808 231 1320
Our colleagues in our employment team have also been looking at how the budget will affect businesses, especially with the headline-grabbing increases to employers’ NI contributions and the increase to the national minimum wage. View our webinar here: How will the Employment Rights Bill affect your Business?
In his insight, James Appleby, Managing Director at Tees Wealth, discussed some of the Budget’s measures and how they may affect your business and personal finances: Chancellor Rachel Reeves’ first budget: New policies to boost UK economy