Capital Gains Tax - Take control or flip a coin? The business owners' dilemma
Tom Wilding | Investment Team
Governments around the world, including the UK, are poised to increase taxes to pay for Covid-19 spending. No one is asking ‘if’. The only questions are ‘Which taxes?’, ‘When?’ and ‘By how much’?
For business owners, especially those thinking of selling some or all of their shares over the next year or two, the key question is: ‘Will I have to pay more Capital Gains Tax’? Of course, no one knows for sure, and there are good arguments for the Chancellor to change it, and equally good arguments for him to leave it alone. But a lot of shareholders are losing sleep over the fact that an increase in CGT could significantly change the net, after tax, value of their shareholdings.
One school of thought is that CGT rates may be brought into line with the individual’s income tax rate. In this scenario, a founder-shareholder with equity worth £20m might find that the tax they pay on the sale of the business would double, or even treble. This shareholder would expect a CGT tax liability of £9m (at 45%, higher rate income tax) relative to today’s £3.8m (20%, less entrepreneurs’ relief), depending on their specific circumstances. In this scenario, if they wait, the business would need to grow quite a bit to achieve the same net return; the equity value would have to increase by 45% to £29m.
Many business owners are talking to us about their options. Having delivered well over 300 transactions over the last 20 years, we know there is no predetermined, one-size-fits-all approach. We have created numerous different types of structures in order to meet the widely varying objectives of owners, managers and other stakeholders. Sometimes this can involve an element of de-risking and realising some equity value whilst retaining a significant stake in the business they’ve grown; sometimes vendors want a complete exit to start the next chapter of their lives; and sometimes they want to remain fully involved, de-risk and see substantial Day 1 benefit.
Here’s the rub: a typical transaction timeframe is 3–4 months. The chancellor may well deliver an Autumn Statement where CGT tax changes are discussed or enacted with immediate effect. So, the real question, if you are thinking of selling and if CGT is a concern, is: ‘Do you want to wait and see what the chancellor decides, or do you want to capitalise on the current certainty?’ As ever, we would be delighted to explore with you what having Sovereign as your investment partner may look like. For an informal discussion, please contact Tom Wilding.