If you are contemplating a business exit within the next few years, then with tax rises on the horizon, now would be a good time to start planning. There are several actions business owners ought to consider now, to maximise their net proceeds after tax.
Fiscal Storm Clouds Ahead?
“As the hopes of millions across the world rise with the recent announcements on COVID-19 vaccines, the economy can slowly begin to re-build itself,” says Julia Rosenbloom, Tax Partner at Smith & Williamson LLP. “However, the Chancellor’s focus will now surely shift towards paying back the debt created by the pandemic. Tax rises seem to be inevitable and are likely to be announced in the next Budget in March 2021.” With this is mind, it is important to start planning for business exit now. Julia highlights below a number of ways a business can start to prepare.
- Get your accounts in order. Good quality and consistent monthly management accounts are more important than the annual audit for buyers. Chaotic accounts are an instant red flag. Also, check the cash levels – high volumes of cash may not be an advantage if tax rises are in prospect.
- Separate investment assets from the business. Properties or other investments held within a trading company need to be dealt with well in advance of a sale. Trying to remove investments from a trading company too near to an actual sale can incur income tax charges.
- Capitalise on existing tax reliefs. Many reliefs could disappear as the Chancellor looks to pay down our burgeoning national debt. For example, Business Asset Disposal relief (formerly Entrepreneurs’ Relief) could suffer further restrictions and consideration should be given to ‘banking’ this valuable relief.
- Consider alternative exit routes. An Employee Ownership Trust (EOT) model provides huge tax and commercial advantages for both employees and owners and we expect this model to be very popular in 2021. Selling a business into an EOT allows for 0% Capital Gains Tax (CGT) which is particularly tempting given CGT rates are likely to rise sharply in the near future, potentially in line with income tax rates with a highest rate of 45%.
- Make a robust succession plan. This needs to be done well in advance of a potential sale and there can be major tax complications from getting it wrong. If there is an intention to pass some wealth or the business itself to family members or others, then doing things in the right order can bring major tax savings, especially in relation to Inheritance Tax.
Be aware that action taken in anticipation of changes can, however, involve significant risk as changes may not be introduced as expected- so it’s worthwhile seeking advice before any action is taken.
But surely the markets are in recession?
Iain Lownes, Corporate Finance Partner at Smith & Williamson Corporate Finance Ltd comments on the current market conditions.
“Recessions can be fallow times for business acquisitions: buyers are nervous, funding is scarce and struggling business have little appeal,” said Iain. “However, this recession has been different; it’s not structural, buyers have deeper pockets and funding is plentiful. As a result, while there was an initial slowdown, the market has been fluid throughout the pandemic. For business owners contemplating a sale, these buoyant conditions, plus looming tax rises should inform their decision-making.” For businesses with sound fundamentals, profits will expectantly bounce back when life returns to a new normal. Buyers have spotted opportunities amid the gloom and many are willing to look at businesses forecasting ‘normal’ trading post-pandemic.
“It helps that buyers are cash-rich,” said Iain. “Many private equity and venture capital businesses raised significant capital before the pandemic, which they have yet to deploy. The pandemic has offered opportunities for ‘buy and build’ strategies (where a suite of acquisitions are made on the basis that the whole is more valuable than the sum of the parts) in sectors where valuations are depressed.
Also, foreign buyers are still active in the UK in spite of ongoing uncertainty over Brexit. Sterling remains weak, which gives UK businesses an additional appeal. Interestingly, funding costs are still at record lows and availability of funding is better than in previous recessions, thanks to government incentives. We have noticed a marked increase in businesses needing advice on how to sell their business in recent weeks as they start to think more pro-actively. Covid-19 has also pushed some business owners to consider de-risking.
“This creates a buoyant environment for acquisition activity,” adds Iain. “We are seeing solid demand across sectors that have shown themselves to be ‘Covid-proof’ – technology, automation and security – but also green shoots for struggling sectors such as hospitality. For instance, we recently worked on a successful sale of a Welsh holiday homes business. If the fundamentals of a business are sound, it’s still a good sale prospect.
“We expect the market to be back at pre-Covid levels in terms of business sales by Autumn 2021. Those contemplating a sale would be well advised to act sooner rather than later.”
If you would like to discuss how we are helping our clients prepare for business exit, please get in touch.
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By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.
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