More than 2,600 UK business owners exit their businesses in September and October as Capital Gains Tax fears grow

Insight | by Stephen Kiggins

Data published by Bloomberg this week highlights the surge in the number of UK business owners exiting their businesses, as concerns grow that the Chancellor will significantly increase Capital Gains Tax in next week’s Budget.

Source: Bloomberg

More than 2,600 UK business owners have exited their businesses in September and October, a significant acceleration which reflects mounting concern that next week’s Budget will introduce substantial increases in Capital Gains Tax (CGT).

The Institute for Fiscal Studies and The Institute for Public Policy Research [think tanks that Labour has used previously for policy ideation] have recommended aligning CGT rates to Income Tax rates - which would see the top CGT rate levied on gains from the sale of shares in a company more than double, from 20% to 45%.

Anna Leach, Chief Economist at the Institute of Directors (IoD) is quoted as saying that there is “huge frustration and huge disappointment” amongst IoD members ahead of the Budget, with many business owners feeling that the anticipated CGT hike contradicts the government’s stated aim of “fostering economic growth”.

“The government is seeking to make a distinction between taxes on working people and taxes on business, with the former being exempt from tax increases following manifesto commitments.

However, this is a false dichotomy… there is a growing incongruence between the government’s purported objective of making growth their number one priority and the trailed direction of policy.”

Anna Leach, Chief Economist at the Institute of Directors

The British Private Equity & Venture Capital Association (BVCA) has also warned that increasing CGT rates will reduce investment in growth-phase businesses.

“If Capital Gains Tax rates rise, we could see a reduction in capital flowing into UK businesses, particularly those in their growth phase.

This could harm innovation and limit the UK’s competitiveness as a hub for entrepreneurship.”

Michael Moore, Director General of BVCA

How could it impact you?

A worked example

How much CGT you pay depends on your income tax band. Top rate taxpayers currently pay 20% CGT on profits made above their CGT annual allowance of £3,000.

Currently, if you were to sell your business and generate a profit of £3 million from that sale, ‘Business Asset Disposal Relief’ [previously called ‘Entrepreneur’s Relief’] would reduce the CGT payable on the first £1m to 10%, and the balance would be taxed at 20% [less your CGT annual allowance of £3,000].

The CGT you would currently pay on the sale of your business realising a £3m profit would therefore be £499,400.

If Labour increases CGT in line with Income Tax rates, as a top rate taxpayer you will pay CGT of £998,650 instead of £499,400 on the sale of the business.

CGT accounts for just 1.3% of total UK tax receipts, but reform of this ‘minor’ tax will have a major impact on UK entrepreneurs - the very individuals capable of creating jobs, driving innovation, and delivering the 'growth' that Labour says will underpin the recovery of the UK economy.

In the face of losing a significant portion of the value they have built over years [or even decades], founders and business owners are now accelerating their exit planning and looking at international relocation to mitigate the impact of the anticipated changes.

"Higher CGT rates would increase the incentive for people to leave the UK before realising gains.”

The Institute for Fiscal Studies [IFS] - 'Capital Gains Tax Reform' [6 October 2024]

Speak with us to explore your options

As the Budget draws closer, now is the time to explore your options.

As international financial planners, we can help you take control of your financial future, ensuring that whatever changes may come, your wealth is protected and positioned for growth. So, if you are thinking about your business exit or relocating away from the UK schedule a consultation with us today or email us at [email protected].

This communication is for information purposes only and does not constitute financial, legal, or tax advice. Please schedule a meeting to receive advice on international financial planning and wealth management.

Current Capital Gains Tax Rates & Annual Allowance

Individuals [including self-employed sole traders, partners in business partnerships, and company owners] are given an annual CGT allowance of £3,000 [down from £6,000 in the 2023/24 tax year and £12,300 in the 2022/23 tax year].

CGT is payable on any profits in excess of the CGT Annual Allowance, from the sale of assets in that tax year. The allowance resets annually on April 6 when the new tax year begins.

18% on residential property
10% on gains from other chargeable assets

CGT is payable on any profits in excess of the CGT Annual Allowance, from the sale of assets in that tax year. The allowance resets annually on April 6 when the new tax year begins.

24% on residential property gains
20% on gains from other chargeable assets
28% on gains from "carried interest" if you manage an investment fund

[There are different allowances for trustees and those with non-domiciled status]

Business Asset Disposal Relief (previously called 'Entrepreneurs’ Relief' - updated in the Finance Act 2020) reduces the rate of Capital Gains Tax (CGT) on disposals of businesses or business assets from 20% to 10%.

There is a cumulative lifetime limit for qualifying gains of £1 million for disposals on or after 11 March 2020. This is reduced from the previous limit of £10 million for Entrepreneur's Relief purposes.

A claim for Business Asset Disposal Relief must be made on or before the first anniversary of the 31 January following the tax year in which the disposal is made.