For many businesses, the last few months have caused enormous challenges and depending on the sector you operate in, these may either have been insurmountable or the consequences of recovery will be felt for many months to come.
We are helping businesses in these situations all the time, through accessing Coronavirus Business Interruption Loan Scheme (CBILS) funding, restructurings or accelerated disposals.
However, there are many businesses who have retrenched, refocussed their cost bases and either maintained or, in some sectors, seen revenues grow as the economy changed. For some, this will be a temporary benefit, whilst for others this may well be a step change that allows them to embark on growth in a new market economy post Coronavirus (COVID-19).
Putting your plans on ice
Selling your business as the world comes out of lockdown might seem like flight of fancy, especially with the news constantly telling us that the recessional consequences of lockdown will be on a historic scale. Who would even want to buy your business anyway and surely, anyone who would, is not going to pay the price that they might have paid in January?
Of course, there are always buyers in any market, but headline prices are under pressure, even amongst businesses that have performed well during the pandemic.
So that’s simple then. For anyone selling their business your plans are now on hold. COVID-19 won’t be here forever and you can ride it out for a couple more years, postpone your retirement plans and that trip of a lifetime. Sorted.
Or is it that simple?
Are Capital Gains Tax (CGT) changes coming? And how might it impact your plans?
On Monday 13 July, the Chancellor of the Exchequer, Rishi Sunak, sent a letter to the “Office of Tax Simplification”. In it, he requested a review of Capital Gains Tax (CGT) with a view to making it simpler and smoother to use for those interacting with it. Namely, those entrepreneurs who have spent their business lives growing their company and see it as their future retirement fund when they do finally sell.
At the end of a few short paragraphs Rishi noted, “I would be interested in […] how gains are taxed compared to other types of income”. For all business owners, these few words are potentially dynamite.
Most didn’t expect that the short paragraph in the Conservative’s December manifesto to review CGT would come about within three months, but it did, and in the March Budget the lifetime allowance for Entrepreneurs’ Relief was slashed by 90%. This brief letter therefore is a warning siren of a potential to bring the taxation of capital gains in line with income. In other words, a potential increase from 20% capital gains tax (after the first £1 million of gain) to 45%.
Of course, there are no crystal balls here, and a return to the early 2000s and Taper Relief depending on length of ownership, would surely need to be factored in somehow for long-term business owners? However, the Government’s willingness to act quickly in a buoyant economy in March is fair notice that change is coming potentially as soon as the chancellor sits down after delivering his speech in October.
In many respects, the chancellor has few levers to pull here given existing manifesto pledges regarding income-based taxes and VAT rates, but with spending during the pandemic at unprecedented levels, tax rises are inevitable for the near term. Whilst increasing CGT from 20% to 45% may not yield the largest windfall for the Treasury, aligning income and capital rates produces an uplift in tax receipts whilst being seen as a simplification of the complex world of tax legislation.
Come the Autumn Statement then, your tax bill on selling your business may more than double and do so overnight.
So, for those businesses who have survived and even thrived during the first half of 2020, undertaking a disposal now may see that the value erosion caused by the pandemic may be more than compensated for by a saving in CGT (if acted upon now). But time is of the essence. There are many active buyers out there; there is competition between them; they are making allowances for the fact that trading dips are only temporary and are focussed on how you are coming out of lockdown, rather than what happened during it. Yes, your headline price may be a little lower than it might have been in January, but you may net more proceeds into your pocket by exiting now, rather than waiting for the world to ‘return to normal’ after this pandemic. Equally, as an owner manager, you may be exhausted by the challenges of business over the last few months and have started to think about a different future for your business, for yourself and for your family.
Take good advice, early
The key to all of this is good advice. Our Corporate Finance team has decades of experience in advising business owners like you through all manner of transactions and navigating you through your options.
We work closely with business owners and shareholders to understand their exit options, as well as buyers who have registered via our Interested Parties Database looking for opportunities to make acquisitions.
Get in contact with your local Quantuma contact to understand how we can help you with clear, objective and empathetic advice.