If you are thinking about selling your business, one key advantage to consider is Capital Gains Tax (CGT). This tax directly impacts the proceeds you receive after the sale, and can influence the overall attractiveness of the deal. Changes in government and evolving tax policies can therefore significantly influence your decision-making and strategy when it comes to timing the market. For instance, on share transactions, existing relief systems like Business Asset Disposal Relief (BADR) can help you to benefit from current legislation. Understanding the current implications of CGT on M&A transactions and remaining mindful of potential changes is essential for effective financial planning and strategic execution.

CGT considerations for business sellers

CGT applies to the profit realised from the sale of assets, such as shares or property within a business. Currently, higher-rate taxpayers face a CGT rate of 20%, though relief systems like BADR can reduce this to 10% on qualifying gains. This lower rate can make selling your business more attractive compared to extracting value through dividends, which are taxed at higher rates.

Note: To qualify for BADR, your business must meet certain conditions. You must have owned the business assets for at least two years prior to the disposal, the business must be a trading business rather than an investment business, and you must be personally involved in the business as a sole trader, partner, or director. Gains made above the £1 million threshold are taxed at the full rate.

It is also important to note that potential buyers will consider the seller’s tax liabilities when negotiating prices. If CGT rates increase, sellers might seek higher prices to offset the higher tax burden, potentially affecting the negotiation process and extending the time to finalise deals.

Potential changes to CGT and their implications

With a Labour government now in power, there is growing speculation about potential changes to CGT. Chancellor Rachel Reeves has indicated that she will not rule out a CGT increase, particularly for higher earners as part of broader fiscal reforms, which could have significant implications for business owners considering a sale.

An increase in CGT rates to align more closely with income tax rates, which can reach up to 45%, could substantially reduce the net proceeds from a sale. This might prompt sellers to demand higher prices to compensate for the increased tax burden. However, any changes might be targeted and could exclude certain assets to avoid discouraging entrepreneurship.

Looking ahead

As we approach the budget announcement on 30 October, the uncertainty surrounding potential CGT changes remains a concern for business owners. If higher CGT rates or reduced reliefs are on the horizon, selling your business sooner rather than later might help you avoid a higher tax bill. The recent rush to complete deals before the government change highlights the anxiety about possible tax increases. This urgency continues, with many aiming to finalise transactions ahead of the budget, despite the risk of retrospective changes or measures to prevent tax avoidance.

However, while the new government faces a significant budget shortfall, recent HMRC data suggests that increasing CGT might not be the most effective way to boost treasury revenue. HMRC’s latest estimates suggest that a 10% increase in the higher CGT rate would, in fact, reduce Treasury revenue by over £2 billion in the 2027/2028 tax year.

For business owners, effective strategic planning and timely action are important to maximise the likelihood of a successful outcome from a business sale. Understanding the current CGT implications, utilising available reliefs, and carefully timing your sale can significantly influence your financial results. In today’s economic climate, these considerations are more critical than ever.

Consulting with financial advisers can provide valuable insights and help you navigate these complexities to achieve the best possible results from your business sale.

For further guidance in selling your business, speak to our Deal Advisory team today.