BLOG: Tax changes put property business sales in focus

For the most part, the Budget was a bit of a non-event. Kemi Badenoch summed it up by asking: “Is that all?” However, it did include two rather spiteful measures with potentially significant implications for business owners.

The first was a 4% surcharge on income that landlords earn from their rented properties. Many landlords may avoid this by transferring their properties into limited companies. The second measure was to reduce the lifetime limit for Business Asset Disposal Relief (BADR) from £1million to £500,000. The Chancellor gave an assurance that he would not increase the rate of Capital Gains Tax. Despite this, a week later, a tax change was announced that could cost some business owners up to £30,000 in additional tax when they sell their business.

Entrepreneurs’ Relief was first introduced on 6th April 2008. The original limit was £10million, which gave business owners a potential tax saving of up to £1.4million. The relief was brought in to encourage entrepreneurs to set up new businesses, and it was a very compelling reason to do so.

Entrepreneurs’ Relief was renamed Business Asset Disposal Relief and, on 11th March 2020, the £10million lifetime limit was reduced to just £1million, giving a maximum tax saving of £140,000. This caused considerable concern among business owners, and the number of multi-million-pound businesses that we sold during the following year fell significantly. Over time, however, some entrepreneurs got used to the higher tax rate, while others moved abroad to avoid paying Capital Gains Tax.

During the next few years, the rate of tax payable under the BADR scheme increased from 10% to 14% and then to 18%. This eroded the value of the benefit still further. The latest change to BADR is, however, another significant reduction for business owners. There was very little warning that it was going to happen, and a lot of people have been caught out.

The people affected are not necessarily wealthy. A letting business that turns over £500,000 per year is unlikely to make a profit of more than £100,000 a year. Nevertheless, a business like this could easily sell for £1million, and the owner could now face an unexpected additional tax bill of £30,000.

Costly sale

A natural instinct for many people is to try to sell their business before the tax change comes in. However, for most people this could turn out to be an expensive mistake.

A business cannot be sold overnight. It usually takes at least a month to prepare a business for sale. We need to carry out the statutory AML checks and prepare a comprehensive marketing information pack with accurate figures that correlate precisely with the accounts. If this process is rushed, there is a risk that mistakes will be made which could have serious consequences later in the sale.

Once the information pack is ready, the marketing campaign will typically take six weeks. Again, if this is rushed, potential buyers may be missed or may not be able to make an offer in time, and the price achieved for the business might be much less than it could have been.

Another problem at this time of year is Christmas. A successful marketing campaign relies on momentum, and it would be a mistake to start a marketing campaign at the beginning of December and then have to stop for two weeks over the Christmas period.

Once a sale is agreed, it usually takes about 12 weeks to complete the transaction. So, unless terms have been agreed by Christmas, it is unlikely that the sale will complete before the end of the tax year on 5th April.

Paying an extra £30,000 in tax is annoying, but if the sales process is rushed, the reduction in the sale price achieved could outweigh the additional tax bill many times over.

Planning ahead for future tax changes

Taking everything into account, my advice to property business owners would be not to try to rush to get their transaction completed before 5th April. However, I think it is highly likely that BADR will be abolished altogether in the next Budget. I also think it is highly likely that the rate of CGT will be increased. If it is, the increase will probably take effect from 5th April 2028.

With this in mind, I would urge people who are thinking of selling their businesses to make very sure that they complete the transaction before the end of the next tax year. This gives plenty of time to prepare thoroughly for the sale in order to ensure that the maximum sale price is agreed. However, it still gives protection against future changes in the tax system.

If you are not planning to retire before April 2028, an alternative option would be to set up a group holding company. The cost of doing this is significant, so it is only appropriate for the owners of quite substantial businesses. However, the potential tax savings can be very significant. A consultation paper on how to prevent people from doing this has just been announced, so if you are thinking of setting up a group holding company, it would be wise to do this sooner rather than later. For the very wealthy, of course, there is always the option of becoming a tax exile.

Adam Walker is a business sales broker who has specialised in the property sector for 44 years.