There has rarely been such an uncertain time in the UK on how our tax regime may evolve over the next two years. Recent tax-raising measures have increased the burden for many workers, but Capital Gains Tax (CGT) has been left largely untouched recently.

While the annual exempt amount has been halved and will be halved again next year, the rate of tax being applied to gains, and the application of business asset disposal relief, remain unchanged. This is often seen as the holy grail for shareholders in UK companies because CGT rates are generally lower than income tax rates, and so there is a desire to maximise gains that are subject to CGT, particularly where Business Assets Disposal Relief applies. A change in government, which may occur before 2025, could lead to a significant disruption to the recent status quo, although opposition parties are consistently giving confusing and conflicting messages on their own policies on CGT.

There’s a real feeling of déjà vu. The threat of an increase in CGT will no doubt lead to many owners of businesses reassessing the timing of a potential exit, which will lead to a flurry of M&A activity before there is any change to the rate of CGT. We are already having early discussions with shareholders and owners of businesses on this topic, which is critical to ensure a well-planned exit to optimise post-tax returns.

A critical element to this is to ensure that the company or business is prepared for a sale from a tax perspective, even where such a sale may not be imminent. This means that all tax returns and payments must be up to date, and a full review of the historical tax filings should be undertaken to identify any areas of potential tax risk so that these can be addressed in advance of any future sale. TAP undertakes a significant amount of tax due diligence work for private equity funds and corporate investors, and all too often, we identify areas of tax risk that have not been properly managed by the current business owners. This will usually lead to a requirement for detailed warranties and indemnities, or potentially the need to defer consideration to fund any tax liabilities should they arise, however remote that likelihood might be. In serious cases, the tax risks we have identified have led to the sale of the business not proceeding, and earlier identification and rectification would undoubtedly have helped matters.

It is therefore important to proactively manage the position, and our advice to sellers, however far in the future that might be, is always:

• Undertake a detailed review of the historical tax position of the business early in the process. A buyer or investor will most likely require tax due diligence to be undertaken, and this review can be carried out in such a way as to proactively collate and maintain all information that will be needed for that review. As mentioned above, any areas of tax risk can then be proactively managed with the UK tax authorities so that they do not become a deal-breaker. In our experience, this approach can pay significant dividends for the sellers.
• Understand your options. The UK tax regime is complex, and the post-tax outcome for sellers can vary wildly depending on whether the consideration is settled in cash at completion, includes deferred consideration such as loan notes, or includes contingent consideration based on future financial results. Business Asset Disposal Relief may be available to reduce the sellers’ tax liabilities, and this should be considered early. It is important that sellers of businesses understand the tax implications of each so that they do not agree to a deal without a clear picture on how they will be taxed.
• Think about the wider team. It is often left until the last minute to recognise and reward senior members of the management team or the wider employees in a tax efficient manager. Careful planning in advance of the sale of a business can often lead to significant tax savings on employee awards through the use of UK tax authority-approved share option arrangements. However, these cannot usually be implemented close to the sale of a business, and therefore, advanced planning is necessary.

How TAP can help

If you are considering selling your UK business or company, no matter how far away that potential exit might be, we can discuss with you the potential tax outcomes that can be achieved.

We can undertake a review of your historical tax position to identify the areas of tax risk that might be reviewed during the sales process so that these can be proactively managed. As the deal progresses, we can advise on the tax treatment of the transaction and apply to the UK tax authorities for the necessary tax clearances relating to the sale.

If you or your clients are considering selling a UK business, please don’t hesitate to get in touch on a no-fee and no-obligation basis.