December 9, 2020
On 11 November, the Government’s own tax advisors, the Office for Tax Simplification (OTS), released their first Capital Gains Tax (CGT) report. Commissioned by the Chancellor in July, the purpose of this report was to advise on how to simplify the taxation of capital gains and to identify areas where current tax rules can distort behaviour or don’t meet their policy intent. The Chancellor also expressed interest in hearing the OTS’s thoughts on the current regime of tax exemptions and reliefs and specifically asked them to review the difference between how gains are taxed compared to other types of income.
In response, the OTS, in their report, has made a number of recommendations, at least two of which, if implemented, would have a major impact on business owners:
CGT is currently taxed at 20% on the disposal of business assets. However, Entrepreneurs’ Relief, if available, results in an effective rate of 10% of the first £1m an individual disposes of in their lifetime. The highest income tax bracket, charged for income earned over £150k, currently sits at 45%. The OTS asserts that this disparity between CGT rates and standard income tax rates is a source of unnecessary complexity for taxpayers. They also argue that it incentivises creatively re-characterising income as capital gains, and that therefore, since most gains are concentrated among a relatively small proportion of taxpayers who tend to have greater flexibility about disposal of their assets, lower CGT rates unfairly benefit the wealthy.
The OTS also makes the case that increasing CGT rates will potentially raise a substantial amount of tax for the Exchequer, although they admit that the subsequent negative impact on people’s willingness to dispose of assets will materially reduce this benefit.
Based on the above, they have recommended raising CGT rates to align with Income Tax rates. Unfortunately, if this is implemented, business owners who are planning to exit their businesses could have to pay in taxes more than double what they would have had to previously!
Entrepreneurs’ Relief was introduced in 2008 to encourage business owners who sell their businesses to reinvest their profits into other start-ups and growing businesses. It also had a secondary objective, which was to provide relief for business owners upon retirement, as an alternative avenue to a standard pension. In his 2020 Budget, the Chancellor reduced the lifetime limit to £1m, claiming that it had had little effect on entrepreneurial activity and that it mostly benefited a small number of affluent taxpayers.
The OTS reported that their findings had similarly shown Entrepreneurs’ Relief to be ineffective, and that incentives for investment would be better applied at the time the investment decision is made. They additionally suggested that an alternative relief could be introduced that focuses on retirement.
Given the increasing requirement to balance the public finances as a result of the pandemic, and the fact that the Chancellor has already slashed Entrepreneurs’ relief by 90%, it is widely expected that CGT rates will indeed be raised and that what remains of Entrepreneurs’ Relief will be removed when the Chancellor announces the Spring Budget in March.
If you are a business owner and you want to mitigate the impact these policies may have on you, you could seek to crystalise the value of your businesses now, secure the current lower tax rates and take advantage of the reliefs while they are still in place. While selling your business outright is an option, this process normally takes at least six months to complete. Any attempt to escalate this timeframe could risk an acquirer using the looming deadline to reduce the value. Therefore, three options remain for you to sell your business and maximise the profits you receive:
In an MBO, instead of finding a third-party buyer for the business, the owner sells directly to the existing management team, who are usually backed by an investor to fund the purchase. In normal circumstances the investor would have a majority stake in the business, with the management team having a material minority position.
Whereas in an MBO the management team must find an outside investor to fund the purchase of the business, in a VIMBO The vendor agrees to fund the transaction by allowing the purchase price to be settled by deferred consideration, using future company profits.
An Employee Ownership Trust is a trust company, formed on behalf of all the employees of a business, to which the business is sold. Giving all the employees a stake in the business, has been found to incentivise them to work harder and be more engaged, driving up business performance.
Like in a VIMBO the consideration for an EOT transaction is normally settled with deferred consideration generated from future company profits however with an EOT, a major benefit is that it is a CGT free transaction for the vendor.
The chart below shows a brief comparison of the main ideas of an MBO, VIMBO and EOT.
The Covid-19 pandemic has hit everyone hard and the Chancellor, who is already seeking to find a way to keep the country’s finances afloat, has received recommendation to greatly increase taxes on capital gains and remove major reliefs for entrepreneurs. This would have material implications for every business owner, significantly reducing their retirement pot.
There are options to help you secure the hard-earned value of your business, and there is time to implement them before these measures come into effect.
A vendor’s personal tax liability is a material element to be considered when exiting your business. Seeking the necessary advice is always recommended at an early stage. If you would like to discuss how any rise in CGT might affect you, please feel free to call me on 07929 389 720 or email me at jamie.johnson@fspg .co.uk.
“We were delighted with the services that Bluebox offered us. Bluebox’s attention to detail through their Diamond Programme ensured that we were well prepared for when the business was taken to market and that the sale process itself was managed expertly.
We challenged Bluebox with finding the right strategic buyer and thereafter negotiating a deal that met our requirements. In helping initially to identify and to secure the deal with Mountville Mills they accomplished just that. Communication throughout was excellent and professional, managing each stage of the process. I would have no hesitation in recommending Bluebox to any corporate shareholder or private business owner looking to divest their business.”
Richard Millward, Former Client
“We were delighted with the services that Bluebox offered us. Bluebox were challenged with finding us the right strategic investor and, thereafter, negotiating a deal that met our complex requirements. In identifying and securing the deal with LGC they have done exactly that. The process itself was efficient and smooth, largely due to the excellent communication from the Bluebox team, who also demonstrated excellent experience at managing a very engaging auction process. I would be delighted to recommend Bluebox to any corporate shareholder or private business owner looking to divest a business.”
Helen Dickinson, Former Client
It has been a real privilege working with the team at Bluebox over this last year or so. Bluebox’s attention to detail ensured that we were well prepared for when the business was taken to market and the sale process itself was managed expertly. Starting the process, I had no idea exactly what this would entail and the volume of work that has been produced by everyone and the result reached today is nothing short of brilliant.
Hugh Morris, Former Client
We are delighted with the services that Bluebox was able to offer. They showed an intimate knowledge of a deal cycle, managed a tight auction process and were highly communicative from the start. I would happily recommend Paul and his team to business owners contemplating a sale of their business in the next 24 months. Experience is key and this has paid off for us.
Laurence Seward, Former Client
Aligning ourselves early with Bluebox, and entrusting the team to guide us through their process proved to be a highly rewarding investment from all viewpoints. Bluebox’s support significantly enhanced both the value of our business and its ‘saleability’. I would highly recommend Bluebox to business owners contemplating an exit in the next two years. The earlier the engagement the better so far as I am concerned.
Mike Minett, Former Client
We began working with Bluebox in early 2015 through their Blue Diamond Programme, as we were contemplating an exit. We found that the process focussed our minds on the key areas of growth in the business, and prepared us well for the inevitable rigours of due diligence. During the sale process itself, the advice offered by the Bluebox team was invaluable. We found them to be helpful, straightforward and honest.
David Stokes, Former Client
When selecting our adviser, it was extremely important that they had access to international buyers and were experienced in cross-border M&A. The team at Bluebox proved to be invaluable by identifying a strategic acquirer from America who was not known to us and by negotiating an excellent deal for all parties. I was also impressed with the process management from Bluebox, which ensured that the deal was closed in a timely fashion.
Jeff Weinstein, Former Client
When I first engaged with Bluebox, I was hesitant as to the benefits of using an advisor to firstly, find a buyer for my business and secondly, to get a deal over the line. However, now that the deal has completed with KPM, I can honestly say that the finer negotiation points handled by Bluebox and their overall management of this process has been nothing short of first class. I would be delighted to recommend Bluebox’s services to any entrepreneur contemplating the sale of their business.
Bill Ballard, Former Client
Bluebox worked closely with us over the following six months and helped us to implement some key initiatives which made InferMed a more attractive acquisition target. Once we decided to sell the business, the Bluebox team were very diligent in ensuring that no stone was left unturned. They negotiated expertly on our behalf to ensure we got the best deal possible.
Alan Montgomery, Former Client
The pre-sale planning programme that we signed up for with Bluebox made us develop our strategies and focus on the bigger picture. It proved to be a very rewarding investment from all viewpoints and significantly enhanced both the value of our business and its ‘saleability’. I would highly recommend Bluebox to business owners contemplating an exit in the next two years.
Nigel Parsons, Former Client
I have experienced first hand the value that can be created through highly structured pre-sale planning. It amazes me that it is not something that everyone does. It is so disappointing to see around 90% of transactions collapse before they complete and pre-sale planning will not only enhance your price, but also significantly enhance your chance of a closed deal.
James Caan, Investor
We worked incredibly closely with our advisers who provided expert knowledge of the sale process with which we were not familiar. We were truly delighted with the results.
Marten Nielson, Former Client
We appointed advisers to manage the sales process after we had received a number of unsolicited approaches for the business. I was incredibly impressed by the immense value that could be created by expertly negotiating with a group of already interested parties.
Paul Duckworth, Former Client
I was delighted with the service that the team offered and their real attention to detail. The deal was not without its complexities and it was reassuring to have such experienced advisers assisting me throughout the negotiations.
Peter Bennett, Former Client
Truly delighted with the way my sale process was managed. The fact that the team I worked with achieved such a great multiple is testament to their experience and their ability to create some true competitive tension.
James Averdieck, Gü, Former Client
The team at Bluebox provided invaluable support in negotiating this complex transaction. Their access to international purchasers, and exceptional knowledge of cross border M&A ensured that the deal was concluded efficiently, achieving a highly successful outcome for us all.
Jon Parslow, Former Client
“We selected Bluebox after a fairly long round of evaluating potential advisors because of their scientific, yet challenging approach to maximising value. During our initial meetings they showed us how far short of “ready” we were and consequently we completed more preparation in the early stages which meant we were equipped for what was to come. We were delighted with our choice of Corporate Finance partner. I do not hesitate in recommending Bluebox for any SME to consider.”
Simon English, Former Client
Bluebox provided invaluable advice in managing the negotiations with incoming investors. Their skills in handling these discussions were evident from the outset and the vital interface that they provided between the incumbent team and the incoming investors was truly beneficial.
Henry Braham, Former Client
Bluebox have a professional, dynamic and experienced team that is greatly assisting me with my focus on my exit within the next 24 months. Their structured approach is very refreshing and their ‘Blue Diamond’ programme is adding immense value.
Matt Evans, Former Client
The team at Bluebox provided me with a seamless service from the start of the engagement until our deal was completed. Attention to detail was commendable and their understanding of corporate M&A very impressive. I could not recommend them highly enough.
Victor Lewis, Former client
Having tried to sell my business previously – and failed – I was only too aware of the importance of pre-sale planning. This is a talented team offering a service that most people find out about, but too late.
Simon Hulme, Former Client
Bluebox are a quality outfit. Their access to International acquirers and relationships with the highest quality domestic investors was impressive. My shareholders and I received excellent service from start to finish and it was refreshing to be dealing with a senior team throughout the sale exercise.
Michael Clapper, Former Client
I cannot recommend the team at Bluebox highly enough. Their expert guidance throughout the entire sale exercise resulted in my shareholders securing an excellent deal with which the entire team was delighted.
Mark Rodol, Former Client
I’m really pleased with the service Bluebox provided. The team demonstrated excellent knowledge of the process to follow and led negotiations for the hospital in a way that allowed us to ensure we received appropriate value whilst focusing on reputational risk. Communication and service were of a very high standard.
Steven Davies, Former Client
With Bluebox’s expert advice we were able to find the right buyer that will benefit our business strategically. We’re delighted with the outcome and look forward to starting our new chapter
Clive Hillier, Former Client
The advice offered by the Bluebox team throughout the process was invaluable to the shareholders. We strongly believe that participating in Bluebox’s pre-sale planning programme was a significant driver behind the success of the deal. Their project management and negotiation skills throughout the sale process itself resulted in an exceptional deal being delivered to all parties involved.
Harpal Singh, Former Client