Are you planning on selling your business?
And let’s face it, if you’ve spent years of your life, and taken risk after risk, to launch and scale your small business, which has become your most valuable asset, then every business owner (well, almost every business owner) will be looking for an exit of some sort at some point.
This might not necessarily be a trade sale – you may be looking to bring your management team into the business with the ultimate goal of them taking over the business via an MBO (Management Buy Out), or you may wish to consider selling to an EOT (Employee Owned Trust).
In each of these cases, you need a goal, and you need to understand your numbers and the associated tax implications in order to receive the capital exit you desire.
One of the critical considerations is the Capital Gains Tax (CGT) implication. While this isn’t currently relevant for an EOT exit, it is critical if you sell your asset in a different way.
Depending on your circumstances, the tax you pay could vary significantly—especially if you qualify for Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief.
Let’s break down how this works using a £2 million sale example. Currently, CGT rates for higher and additional rate taxpayers are 20%, but there’s been ongoing speculation about potential increases, perhaps to as high as 30%. Here’s what you need to know:
Scenario 1: Selling Your Business at £2 Million – Current CGT Rates
If you’re selling your business for £2 million today, and you’re a higher or additional rate taxpayer who qualifies for BADR, here’s how the tax works:
- With BADR:
BADR allows you to pay a reduced CGT rate of 10% on the first £1 million of lifetime gains. This is significant if you qualify, as it saves a substantial amount in tax.
For a £2 million sale:
- The first £1 million is taxed at 10% = £100,000
- The remaining £1 million is taxed at 20% = £200,000
Total Tax = £300,000
This leaves you with £1.7 million in net proceeds.
- Without BADR:
If you don’t qualify for BADR, the entire £2 million gain would be taxed at 20%.
- £2 million × 20% = £400,000
Total Tax = £400,000
This leaves you with £1.6 million in net proceeds.
How much more would you need to sell for to achieve the same £1.7 million net proceeds without BADR?
If BADR doesn’t apply, the entire gain would be taxed at 20%. So, to achieve the same £1.7 million net proceeds, you would need to sell for approximately £2.125 million. This slight increase in the sale price compensates for the higher tax burden without the relief.
Scenario 2: Selling your Business if CGT Rates Rise to 30%?
Let’s imagine the government decides to increase CGT rates to 30%. How would this affect your net proceeds?
- With BADR (10% on the First £1 Million):
If BADR remains unchanged:
- First £1 million at 10% = £100,000
- Next £1 million at 30% = £300,000
Total Tax = £400,000
This leaves you with £1.6 million in net proceeds.
- Without BADR:
Without BADR, the entire gain is taxed at 30%.
- £2 million × 30% = £600,000
Total Tax = £600,000
This leaves you with £1.4 million in net proceeds.
How to achieve £1.7 million net proceeds when selling your business for £2 million if CGT changes to 30%
If your goal is to walk away with £1.7 million in your pocket, you’ll need to adjust your selling price depending on whether BADR applies or not and based on the CGT rate.
- If CGT is 30% and you qualify for BADR:
You would need to sell for approximately £2.143 million to net £1.7 million after tax.
- If CGT is 30% and you don’t qualify for BADR:
You would need to sell for approximately £2.429 million to net £1.7 million after tax.
Scenario 3: Selling your business for £10 million
Now, let’s consider a higher sales value of £10 million to see how BADR and CGT rates affect a more significant transaction.
- With BADR and current CGT rates:
BADR still applies to the first £1 million of gains at 10%, with the rest taxed at 20%.- First £1 million at 10%: £100,000 in tax.
- Remaining £9 million at 20%: £1.8 million in tax.
Total Tax = £1.9 million
This leaves you with £8.1 million in net proceeds. - Without BADR and current CGT rates:
Without BADR, the entire £10 million would be taxed at 20%.- £10 million × 20% = £2 million in tax.
Total Tax = £2 million
This leaves you with £8 million in net proceeds. -
What if CGT Rises to 30%?
If the CGT rate increases to 30%, the impact on a £10 million sale is even more pronounced:
- With BADR:
The first £1 million is still taxed at 10%, but the remaining £9 million would now be taxed at 30%.- First £1 million at 10%: £100,000 in tax.
- Remaining £9 million at 30%: £2.7 million in tax.
Total Tax = £2.8 million
This leaves you with £7.2 million in net proceeds. - Without BADR:
If you don’t qualify for BADR, the entire £10 million would be taxed at 30%.- £10 million × 30% = £3 million in tax.
Total Tax = £3 million
This leaves you with £7 million in net proceeds.
- With BADR:
How much more would you need to sell for to achieve £8.1 million net proceeds?
To achieve the same £8.1 million net proceeds under a 30% CGT rate, let’s calculate the required sale price:
-
- With BADR:
You would need to sell for approximately £11.54 million to achieve £8.1 million net, assuming the first £1 million is taxed at 10% and the rest at 30%. - Without BADR:
You would need to sell for approximately £11.57 million to achieve £8.1 million net, assuming the entire gain is taxed at 30%.
- With BADR:
Planning Your Exit: Key Takeaways
When it comes to selling your business, it isn’t just about finding a buyer! Planning ahead is essential.
The first step is to understand what you need in terms of proceeds after tax and other costs. This then allows you work backwards to see what gross proceeds you need in order to achieve this figure.
The key question to ask yourself is “how much is enough?” and this is something that your financial advisor can help you determine if you are unsure where to start.
When undertaking this exercise the difference between qualifying for BADR and not may seem subtle to the bigger businesses out there.
For a smaller business, particularly those with a number of shareholders, it could mean your headline sale price needs to be hundreds of thousands of pounds higher in order for you to achieve your goals.
And with CGT rates potentially increasing, those differences could be even more pronounced.
Whether you’re ready to sell now or planning for a future exit, it’s crucial to get the right advice to maximise your net proceeds.
At IN Accountancy, we’re here to help you navigate these complexities, ensuring you’re in the best position to achieve your goals.
For more on selling your business, visit our YouTube Channel or drop us a line to arrange to speak with our Tax Director Paul.
