Rumoured Capital Gains Tax changes prompting businesses to take action

Hugh Minnock, senior investment manager at Foresight

Hugh Minnock, senior investment manager at Foresight - Credit: Foresight

Capital Gains Tax (CGT) has been a hot topic for entrepreneurs and business owners in 2020.

In March the lifetime limit on Entrepreneurs’ Relief on businesses or asset sales was reduced from £10m to £1m, apparently netting an additional £2bn per year for HMRC.

In November a report by the Office for Tax Simplification (OTS) to the treasury was made public, which highlighted that aligning CGT with income tax could net HMRC another £14bn per year.

Such a change would be similar to the tax regime in place for 20 years before 2007, with the OTS logic being this would bring the tax treatment of business and asset sales in line with bonuses and pension withdrawals.

The potential for changes to CGT have prompted an increase in the number of business owners and long-term shareholders considering a sale.

This is hardly surprising when a failure to sell before any changes to CGT could mean many years of hard work and risk for the same net gain. These changes are likely to be especially relevant for the many business owners who sacrifice income each year in order to diligently build retained earnings in their business.

This spotlight on the sale of the business can prompt a fresh review of strategy and renew the focus on succession planning. Such considerations can come with risks. Business owners are often tempted to use instruments such as Employee Ownership Trusts or Vendor Loan Notes to capture the value in their business without involving third parties.

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These come with the risk that unprepared or unenthusiastic employees become owners of a business where the profits are used to repay debts owed to the former owners, often for years post the initial deal. Equally, for the vendors, it does not provide cash on completion.

Trade sales of companies to corporate buyers come with a different set of risks around deliverability and valuation, and length of process. These risks can be mitigated with the right equity partner. At Foresight, we have spent over 35 years providing equity to support SMEs.

Last year Foresight completed 20 new investments as well as 25 follow-on investments into our portfolio of over 100 UK SMEs. We have completed more than 50 equity release investments over recent years, in each case helping owner managers transition ownership and management whilst providing growth capital and expertise to drive each company forward.

Owner managers can stay cash out, but stay involved, retaining an interest in the growth of the company as it continues to develop with our support. Foresight Group LLP is regulated by the Financial Conduct Authority.