Capital gains tax on business sales
One of Rachel Reeves revenue raising tactics in the recent Budget is to gradually increase the Capital Gains Tax on business sales in the coming years. Which means that business owners contemplating a sale might be advised to complete a disposal sooner rather than later.
Matthew Burns, RPGCC’s Head of Corporate Finance added “As at Budget day you have 5 months to complete a sale of business to ensure you avoid missing out on the potential tax saving”.
Until 6 April 2025, Business Asset Disposal Relief (BADR), previously Entrepreneurs’ Relief (ER), reduces the rate of Capital Gains Tax (CGT) on disposals of businesses or business assets from 24% to 10%. From 6 April 2025, CGT on disposals of businesses or business assets will increase from 10% to 14%.
This means that the maximum potential tax saving will drop by £40,000 to £100,000 per shareholder. So for a typical family business, the saving across the shareholders is likely to be a multiple of this figure.
Anand Chandarana, our Corporate Tax Director added “If we put it another way, delaying a sale beyond 6 April, will lead to a 40% increase in tax on the first £1m of gains per shareholder. We have dealt with a number of pre-Budget disposals in the first part of the year and our client-led approach means that we have project managed each one to success”
Let’s dig a little deeper!
Capital Gains tax on business sales – Capital Gains Tax (CGT) increases
When a qualifying business is sold, any capital profit on disposal can be covered by Business Asset Disposal Relief (BADR) and in the past – for lifetime business disposals up to £1m – gains have been subject to a 10% CGT charge.
But that is about to change. In the Autumn Budget of October 2024, the following changes are set to take effect over the next two years:
Current Rate: As of now, qualifying gains under BADR are taxed at a flat rate of 10%.
From 6 April 2025: The BADR tax rate will increase to 14%.
From 6 April 2026: The BADR tax rate will further increase to 18%, aligning it with the new main lower rate of CGT.
These adjustments are part of broader reforms to the UK’s CGT system, aiming to raise revenue while maintaining international competitiveness. The main CGT rates have been increased from 10% to 18% for the lower rate, and from 20% to 24% for the higher rate, effective from 30 October 2024.
It’s important to note that the lifetime limit for Business Asset Disposal Relief remains unchanged at £1 million. This means that eligible individuals can still claim the relief on qualifying gains up to this threshold, but the applicable tax rates on these gains will be higher in the coming years.
Where the qualifying conditions are met and a disposal is on the cards, it makes sense to make the disposal prior to 6 April 2025 – saving up to 14% where the higher rate would otherwise apply.
Anand, further added, “The increase in the BADR rate also catches pre-Budget share exchanges where gains have been rolled over against a new holding – in these cases, if a taxpayer wants to avail themselves of the 10% rate, they will need to make an election to HMRC before 5 April 2025 rather than waiting for their Tax Return as it is the date of the election that will fix the tax rate”
Are you selling a Furnished Holiday Let (FHL) property?
From April 2025, the present favourable tax treatment of FHL rental businesses will cease.
In relation to BADR, where the FHL conditions are satisfied in relation to a business that ceased, relief may continue to apply to a disposal that occurs within the normal 3-year period following cessation.
Landlords with furnished holiday lettings who meet the conditions can therefore benefit if they dispose of their property within three years from the end of their FHL business. Again, making the disposal sooner rather than later will maximise the impact of BADR. The savings where the gain would be taxed at the higher rate fall to 10% from April 2025 and to 6% from April 2026.
Consider your Capital Gains Tax on business sales or BADR options now!!
Clearly, disposing of a business or business property is a major event in the create-build-buy-sell cycle and planning for the most effective way to undertake this option is paramount.
If you are ready to sell your business, and capital gains tax on business sales is a serious consideration you should start the process as soon as possible. The corporate finance team at RPGCC have advised on a large number of business disposal transactions. Our experience is that a business sale takes between 4 to 6 months, so the clock is very much ticking!
If you would like to speak to a member of our Corporate Tax team about business asset disposal relief or indeed our Corporate Finance team about business sales or exit planning please contact us on 020 7870 9050. If you would like to read our full Autumn Budget Report for 2024 you can find it here.
