The Covid-19 pandemic has had a huge effect on everyone in 2020, but it will continue to have longer-term effects as governments look for ways to address the unexpected spending and lost income, they have faced this year. One possibility that has been discussed in both the UK and the USA is increasing Capital Gains Tax to boost the public finances. If this goes ahead then it could have significant implications for business owners who are thinking about selling.
Capital Gains Tax Increases
Raising Capital Gains Tax is one of the options that the government is considering in order to cover the costs of the Covid-19 pandemic. A recent report from the Office for Tax Simplification (OTS) suggested that an additional £14 billion could be raised by making changes to the tax. The recommendations included doubling the rate of Capital Gains Tax to bring it in line with income tax while also reducing exemptions. While such dramatic changes to the tax system are unlikely to happen immediately, the government will be considering how they can generate more from Capital Gains Tax. Smaller changes to the system may be more likely. Increasing Capital Gains Tax, perhaps to a flat rate of 28%, has been discussed for a long time and the current situation may provide the impetus for the government to act.
How Could It Affect Your Business Sale?
Changes to Capital Gains Tax could have big implications if you are planning to sell your business. The amount you pay on capital gains is currently determined by your income, with only those earning over £50,000 a year paying the highest rate of 20%. In addition there is Entrepreneurs relief – reducing capital gains to 10% of the 1st £1m of gains on a business sale. Until March 2020 this relief was up to the first £10m, so the Government have indicated they are not afraid to change this tax.
Overall Capital gains rates are lower than for income tax because gains are often accumulated over a long period. If you’ve spent years building up your business before selling, it doesn’t make sense to tax you at the same rate as the income that you generate every year. The effects of increasing Capital Gains Tax would be particularly hard for small business owners (i.e. abolishing Entrepreneurs relief) as it could dramatically cut the cash retained when selling up – often a vital component of their pension.
Is Now the Right Time to Sell Your Business?
The risk of an increase in Capital Gains Tax could mean that it is better to sell your business now rather than to wait until the rates rise. However, it is unclear when or if the Government will increase Capital Gains Tax, so this shouldn’t be the only factor you consider, especially if you weren’t planning to sell for at least a few years – the tax tail should not wag the commercial dog. Indeed, it could be better to wait and risk paying more in taxes if you increase the value of your business over the next few years, as long as the value growth outweighs any increase in taxes.
It is also worth considering what you will be doing with the proceeds. An increase in Capital Gains Taxes could also affect any investments you’re planning to make in the future, as you will pay tax on the profits you make from these too.
In conclusion, whilst an increase in Capital Gains Tax could be on the cards, which could mean selling your business now rather than later is better, it’s important to look at the bigger picture of what your business could be worth in the future.
Fortunately, you are not alone. At Business Partnership we can help you understand the current value of your business and what it could be worth in a few years, to help you judge this vital decision.