Sue Green partner at Corporate financiers Watersheds who specialise in helping SME owners buy and sell companies, explains how a Jeremy Corbyn Labour government would impact SME owners and entrepreneurs who are planning a sale, succession or retirement during the term of the next government.
Sue Green said, “There is a distinct nervousness in the air right now amongst private business owners who are thinking about their exit plans.
“Since 2008 those selling shares in private companies, often the business that they or their family have spent a lifetime building, have paid tax on any capital gain on the sale of their business at a preferential rate of 10% tax under the Entrepreneur’s Relief provisions.
“This has been seen by many as an incentive and reward to those who start and run a business, creating employment and investment, often taking substantial personal risk and responsibility along the way.
“Successive governments have tinkered around the edges of Entrepreneur’s Relief, closing loopholes and tightening the criteria to ensure the system isn’t abused, and the relief is only available to genuine business owners on genuine sales. But none has, thus far, attempted a wholesale review of this relief.
“Under a Corbyn-led Labour government, this would likely change. Alongside an eye watering array of commitments for increased public spending and nationalisation sits a commitment to “end the unfairness that sees income from wealth taxed at lower rates than income from work” and to “reform the inefficient system of tax reliefs”.
“Within a month of taking office, a review of all tax reliefs currently in operation will be undertaken, with reports and recommendations after six months. Whilst there is no specific mention of Entrepreneur’s Relief (ER), it is widely assumed that it will come under very close scrutiny as part of that review. “
So, what could the impact be on business owners who are thinking about retiring and selling their business?
Green warns, “A simple removal of ER, with gains falling into the current capital gains tax (CGT) regime would double the tax burden on business owners when they sell. If CGT were to be taxed as the top slice of income tax, as it was in the past, this could see tax rates for those who are selling increase five- fold from 10% to an eye-popping 50% of the value of the business!
“So if a business was sold for £1m the tax will be £100,000. Under chancellor John McDonnell it is likely to be £500,000 tax pretty early in the government’s term, and who knows where tax will get to as spending plans get under way.”
“What will business owners do? The prospect of paying 50% tax on their life’s work won’t be an attractive one, but options are limited.
“Some will, no doubt, hope to achieve a higher sale price for the business to compensate for the increased tax rate. But the market determines value; just because HMRC are taking a larger share of your gain doesn’t make the business’ value increase.
“Others may simply decide that they would prefer to shut the business rather than hand over half of their cash. But the reality is that any surplus cash arising from such an exercise will be significantly less than would have been achieved from a sale as a going concern, and will likely still be taxed in the same way.
“Perhaps there will be a return to trying to pass the business to the next generation (they would be inheriting the cash in any case, so why not inherit the business). Sadly, well-educated offspring don’t always aspire to running the family business and taking over from Mum and Dad; they may want to become Doctors, Bankers, Lawyers or Social Media Influencers instead!
“Passing the business to the kids also doesn’t help generate the cash the parents are probably hoping for so they can enjoy the retirement plans that perhaps inspired them to make the sacrifices it takes to start and grow a business.
“Whilst clever accountants and lawyers will hurriedly scour the legislation for loopholes, the General Anti Avoidance Rule and the cost of such advice will scupper the hopes of smaller or family-owned businesses. They will have little option but to pay the tax and plan for a more frugal retirement.”