05 Feb 2021

Essential advice for retailers selling their businesses

Independent retailers looking to sell their business for whatever reason are being encouraged to complete the transaction quickly or potentially face higher tax bills on the proceeds.

Chris Rowlands, managing director of Blacks Business Brokers, has made the warning ahead of the Budget on March 3, when the Chancellor could raise Capital Gains Tax (CGT) rates and allowances, as he seeks to recoup the costs of the Government’s pandemic response.

CGT is paid on the gain (profit) when an individual sells an asset, meaning that if somebody purchased an asset for £200,000 and subsequently sold it for £300,000 then £100,000 would be subject to CGT. If, however, they were selling a business they had built from scratch then the whole amount for which it was sold would be likely to be taxable.

Mr Rowlands said: “There will be political pressure on the Chancellor not to increase taxes in a way that obviously reduces consumers’ or companies’ disposal income, so I don’t expect any changes to Income Tax, National Insurance, VAT or Corporation Tax this year. Post-Covid Britain will need to spend its way out of recession so the Budget is unlikely to target ‘earned’ income.

“However, CGT is often seen as a tax on financial transactions, paid by venture capitalists, hedge fund managers and property speculators. In the real world, of course, it is also paid by hundreds of thousands of entrepreneurs every year when they sell their businesses, either to pursue other opportunities or to retire.

“This should make the Chancellor think twice about raising the rate of CGT, or reducing the annual tax-free allowance for capital gains, but I suspect it might not. A year ago, we should remember, Mr Sunak slashed the lifetime limit for Entrepreneurs Relief from CGT, showing he is not afraid to target business owners.”

In his first Budget, delivered on 11 March 2020, Chancellor of the Exchequer Rishi Sunak reduced the lifetime allowance for gains eligible for Entrepreneurs Relief, on which CGT is paid at a reduced rate of 10 per cent, from £10 million to £1 million. He also renamed it “Business Asset Disposal Relief.”

“Renaming Entrepreneurs Relief last year looked like a clear warning shot,” Mr Rowlands continued. “Calling it ‘Business Asset Disposal Relief’ links it more closely with professional investors than the owners of corner shops, newsagents or high-street butchers in the public imagination, making it politically easier either to alter the rate at which tax is relieved or to abolish the relief altogether in future.”

Entrepreneurs Relief is not the only aspect of CGT that the Chancellor could have in his sights on 3 March. CGT on most business sales is currently charged at ten per cent for basic rate income taxpayers and 20 per cent for higher and additional rate taxpayers*, which compares to a basic rate of income tax of 20 per cent, a higher rate of 40 per cent and an additional rate of 45 per cent.

The Chancellor could choose to close the gap between tax on income and capital gains. He might also reduce or abolish the annual allowance that currently allows individuals to realise gains of up to £12,300 per year before CGT becomes payable.

Mr Rowlands said, “CGT looks like a sitting duck for the Chancellor and, if he does reform it, some or all of the changes might have immediate effect. Last year’s cut to Entrepreneurs’ Relief was imposed from midnight on Budget Day, rather than from the beginning of the new tax year on 6 April, so time is of the essence for business vendors who want to be certain of keeping as much as possible of the proceeds from the sale of their life’s work.”

*Capital Gains Tax is currently charged at a standard rate of ten per cent on taxable gains that, combined with the vendor’s income that year, take the taxpayer’s total income up to the threshold for payment of higher rate income tax. Any taxable gains that, combined with the taxpayer’s other income, fall above the higher rate threshold suffer tax at a marginal rate of 20 per cent. Higher rates (18 per cent for basic rate and 28 per cent for higher rate taxpayers) apply to the sale of second homes and residential buy-to-let properties.

This information is an opinion and not tax advice. While every effort has been made to ensure the rates and calculations included above are accurate, Blacks Business Brokers cannot be held liable for any errors or omissions. Every taxpayer’s circumstances are different, and their precise liability to tax will differ, so individuals should always seek the advice of a qualified accountant before making any decisions based on rates of taxation.

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