In the run up to the Autumn Budget on 30 October 2024, there was much impetus for getting the sale of privately owned businesses over the line. Whilst the worst fears of entrepreneurs were not realised in the new Chancellor of the Exchequer, Rachel Reeves’ first Budget, changes were announced which will renew this impetus for family owned businesses to be sold or for succession to take place.
There are a number of considerations. The starting point is to know what your business is worth and to have an awareness of what you want to happen to your business. In other words, do you want to sell the business to realise a sum of cash for your retirement or further investment, or alternatively, do you want to pass your business down to the next generation in your family. Depending on your objectives, your attention will then be directed to either Capital Gains Tax if the former, or Inheritance Tax if the latter.
Capital Gains Tax (“CGT”) and Open Market Sales of Your Business
The Chancellor announced increases in the rate of CGT for disposals qualifying for Business Asset Disposal Relief, previously known as Entrepreneurs’ Relief. The current tax rate of 10% on the first £1million of gains for such disposals increases to 14% effective from 6 April 2025 and to 18% effective from 6 April 2026.
The main rates for CGT will also increase for disposals made on or after 30 October 2024. The basic rate of 10% will increase to 18% and the 20% rate will increase to 24%. Different rates of CGT apply to disposals of residential property, carried interest and property held in trust.
The likely impact of these changes is that there will be an acceleration of disposals before 6 April 2025 and 6 April 2026 to take advantage of the lower rates of CGT on assets qualifying for Business Asset Disposal Relief. Given the lead time into effecting a sale, which at a minimum can take a month, action needs to be taken now if a sale is to benefit from the 10% CGT rate applying up to 5 April 2025.
Inheritance Tax (“IHT”) and Family Succession for Your Business
The most controversial announcement by the Chancellor was the introduction of arbitrary limits on the value of Business Property Relief (“BPR”) and Agricultural Property Relief (“APR”). Currently BPR and APR are given at the rate of 100% of the value of a business or agricultural property meaning that the owner of a family business can be succeeded by other members of a family, typically the younger generation, with no IHT being payable.
From 6 April 2026, the existing 100% rate of relief will only be available for the first £1million of property qualifying for BPR and APR. Thereafter, the rate of relief for both BPR and APR will be 50% of the standard 40% rate of IHT for any qualifying assets over the £1million threshold. The new rules will apply to lifetime transfers made after 30 October 2024 where the donor dies on or after 6 April 2026.
This is a significant blow for many family owned businesses as well as farming and landowning families who wish to pass on an estate to the next generation as IHT at the rate of 20% will apply to the full value of assets in excess of £1million. There is a risk that a high number of long-standing family owned businesses and farming businesses will have to be sold or will fail as a result as the imposition of IHT on a death after 5 April 2026 will only be affordable following a sale of the business or estate.
With only a short reprieve before the new rules come into effect, it is essential that those likely to be affected by the new rules engage with their professional tax advisors now to try and mitigate the impact.
Conclusions
If you have decided to sell your business, there is no time like the present to get on and sell to take advantage of the 10% CGT rate, or the 14% CGT rate that follows.
If you are thinking of passing your business down a generation, then consideration needs to be given to a lifetime gift of all or part of your business to take advantage of the current unlimited reliefs for BPR and APR for IHT purposes. Any lifetime giving before 6 April 2026 will require the donor to live seven years from the gift to not be caught by the new rules, but this risk might be covered through life assurance if thought appropriate.
Best of all, talk to your professional advisors, to get their views on how these tax changes will affect your position. They may after all have ideas on how to side step the new rules altogether!
About the Author
Stuart Ritchie is an expert tax advisor with over 30 years of experience in the field who founded his own accountancy firm Ritchie Phillips LLP in 2003, through which he provides specialist taxation and accountancy services. Ritchie is also a fellow of the Institute of Chartered Accountants in England and Wales (ICAEW), a member of the Chartered Institute of Taxation, and a chair of the ICAEW Tax Faculty Private Client Committee. This provides him with a unique insight into the developments and trends within the world of high-net-worth and ultra-high-net-worth individuals.
Stuart’s new book, Who Will Get My Money When I Die?, unpacks the seemingly complex world of wills and Inheritance Tax, equipping readers with the knowledge to plan their future with confidence.
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