Capital Gains Tax changes – Mitigating and minimising the burden

Following the October 2024 increase in Capital Gains Tax and the announcement that the CGT charged on Business Asset Disposal Relief (BADR) would increase in both 2025 and 2026, many business owners are likely wondering how they can mitigate the impact of these changes.

Fundamentally, owners who are not ready to put their business on the market should not rush into a sale process simply to lock in a favourable tax rate – any tax savings made would most likely be offset by the value lost by bringing an unprepared business to market.

Tax considerations are rarely the decisive factor in opting for a sale – and they shouldn’t be. Instead, favourable tax rates should mainly be seen as an attractive bonus at the end of a thorough exit process. Owners should only sell if the business is saleable and they are emotionally ready to leave.

However, for owners who have undertaken a proper exit preparation process and are certain that both they and their business are ready for a sale – there may yet be time to lock in a sale prior to the coming increases.

In this piece, we’ll look at the various transactions that may be possible prior to the two increases, how owners can be sure they are exit-ready, ways to expedite the sale process and other exit strategies that can help to reduce CGT liabilities.

The tax landscape and upcoming changes

One of the major announcements in the October Budget, the first under the new Labour government, was an immediate increase in Capital Gains Tax – with the lower rate rising from 10 per cent to 18 per cent and the upper rate increasing from 20 per cent to 24 per cent.

The updated rates applied to any disposals made on or after October 30 2024 (the day the Budget was delivered), giving owners no chance of avoiding the increase. While CGT increases had been widely expected for several years, this would still have been a bitter pill for many owners who had been holding off on their exit strategies amid recent economic turmoil.

Framed as something of a consolation for such owners, the government also announced that the lifetime limit for Business Asset Disposal Relief (BADR) would be kept at £1 million. However, this also came with a significant caveat: the rate of CGT charged on BADR and Investors’ Relief would increase from 10 per cent to 14 per cent on April 6 2025 and again to 18 per cent from April 6 2026.

Clearly, this adds up to a significant tax hike for exiting business owners – with the lower rate of CGT rising 80 per cent and the upper rate increasing 20 per cent. CGT on BADR will then rise by 40 per cent this coming April and again next year, meaning an 80 per cent increase in the space of 12 months.

Find out more about what the changes to BADR rates mean for exiting business owners.

Should owners seek to lock in favourable BADR rates?

If an owner has not yet got their business exit-ready, then the simple answer is a very firm no. A sale process should take a minimum of three years and, ideally, five. As we have emphasised previously, the gains made by rushing the business to market to lock in favourable tax rates would be extremely slight indeed compared to the value that can be unlocked by growing a business, scaling up, preparing it for sale and conducting a thorough sale process.

However, there are also likely to be many business owners in the UK who are (or are close to being) exit ready. Some may have been seeking to exit for years, but have held off amid low company valuations, while others may have been cognizant of the likelihood of CGT increases and began their exit preparations over recent years.
For this number, the abrupt increase in CGT will have been disappointing – but there may yet be time to act before further tax increases.

Selling before April 6 2025
The bad news is that, unless an owner is proceeding with negotiations with a committed bidder, selling prior to the April 6 2025 increase in CGT on Business Asset Disposal Relief is likely to only be possible for extremely simple deals and it would be too late to undertake a standard sale process.

A simple transaction that might be feasible for an owner to close prior to April 6 2025 is if there were shareholders willing to buy out the owner’s stake. If an owner is in the midst of a standard sale process, there may be steps that can be taken to expedite the process (more on this further on) and achieve closure prior to the increase – but, again, caution should always be taken and the owner should remain mindful that the cost of rushing may be higher than the gains made from a lower rate.

Selling prior to April 6 2026
The good news, for owners who are ready to sell, is that they should be able to avoid the 18 per cent rate that will apply from April 6 2026 – providing they act now and give themselves sufficient time to undertake a proper sale process over the next 14 months.

Gauging exit readiness – Moving to the final phase

However, knowing when you are ready to sell is easier said than done. There are a myriad of personal and business-related considerations that must be satisfied in order for both the business and the owner to be ready to move to the final phase.

In the final key stage of the exit preparation process, the vendor assesses their exit options, prepares for their chosen exit path, engages advisors such as bankers, attorneys and tax planners and begins the process of engaging with potential buyers.

It is, in a nutshell, the transitory phase in which an owner moves from preparing to sell a business to actively beginning the process. The business must be ready-to-sell and the owner prepared to move on to dealmaking, due diligence and securing the sale.

There are a number of key prerequisites signifiying that the business is saleable and attractive to potential buyers and that the owner is ready to sell.

Financial readiness
The business’ financial documents, such as balance sheet, cash flow and income statements, are clean, audited and have all been prepared according to Generally Accepted Accounting Principles (GAAP). The owner has collected and organised accurate historical financial records for the business dating back at least 3 – 5 years.

Furthermore, following a successful exit preparation process focused on scaling up the business, solidifying cashflow and growing revenue, the business is able to demonstrate consistent revenue growth and profitability.
In addition to strong, predictable cashflow, unnecessary liabilities have been minimised, demonstrating the business’ ability to service debts through its cashflow, while still funding future growth.

The owner has identified areas where value can be enhanced and acted upon them; after consulting a professional, they have a clear understanding of their company’s valuation and are able to set a realistic asking price.

Operational efficiency
The business has developed documented systems and processes, including standard operating procedures (SOPs) for all core functions. These are well-documented throughout the business, repeatable and scalable.

The business model is also scalable, with diversified revenue streams that can minimise risk. Overseeing it all is a strong management team capable of running the business and willing to stay in place post-transition.

Read more – Scaling up a six-figure business pre-sale

Owner decentralised
Key to ensuring a strong management team, the owner has decentralised themselves from the day-to-day running of the business. The management team can run the business in the owner’s absence, knowledge and key relationships are not concentrated with one or two figures and there is a clear scope for progression, with strong staff morale.

Find out more – The importance of decentralising a business owner

Strong, competitive market position
The business’ unique value proposition and competitive advantages are clearly defined, with any threats from competitors or market shifts addressed. The company has a diverse customer base, with no single customer accounting for over 10 – 15 per cent of revenue.

Clear growth opportunities, including new markets, new products and services, have been identified and documented, with a clear, actionable plan for growth in place.

Legal and risk management undertaken
All of the business’ corporate records, ownership documents and key contracts, such as leases, customer and vendor agreements, are in place – paving the wat for a smooth transfer of ownership.

Potential legal, environmental and operational risks that could impact the business’ valuation have been identified and addressed and the business has maintained proper insurance coverage.

The business is compliant with all relevant regulatory requirements and any outstanding tax liabilities have been resolved.

Owner readiness
The owner is personally ready to pass the business on. They have defined their post-exit goals relating to finances, lifestyle and purpose and aligned these with the timing and financial outcome of the sale.

They have developed a personal financial plan outlining how they can support their long-term goals through the sale proceeds, whilst also understanding the tax implications of the sale and having taken steps to minimise their liabilities where possible.

Crucially, they are emotionally ready to let go of the business, to cede control of the day-to-day operations to a new owner.

Read more - Are you really ready to sell your business?

Sale ready
The business is ready to be sold – the ownership have decided on their preferred type of exit (third party sale to strategic buyer, sale to private equity, EOT or MBO, family succession) and created a clear timeline for the process from beginning to close.

Initiatives to increase the company’s attractiveness to buyers – such as risk mitigation, improving margins, diversifying revenue – have been set and completed.

Read more – Making your business a more attractive acquisition target

A team of advisors, such as business brokers, attorneys and wealth advisors, have been assembled to guide the owner through the sale process and a pre-sale due diligence review has been conducted to identify and remedy potential remaining dealbreakers.

Always saleable
The business is moving toward a state of being “always saleable” – meaning that, even if a sale isn’t imminent, the business is prepared and ready to capitalise whenever the right opportunity arises.

Interim milestones for addressing any remaining gaps have been set, key actions identified, prioritised and broken down into achievable steps, with a timeline in place for completing this process.

Addressing these prerequisites enables an owner to position their company as an attractive, sale-ready asset and increases the likelihood of a smooth and profitable transition to new ownership.

Expediting a third-party sale

Once owner and business are both fully exit ready, they can begin the process of marketing the business for sale. There are numerous steps that owners can take to expedite this process if they are seeking to complete a sale prior to the second increase in BADR next year.

Firstly, however, it is important to note that while there are ways to expedite a sale, owners should still be prepared for it to take up to a year and accept that they may be unable to close the deal prior to the April 6 2026 deadline.

In this scenario, it would be advisable to simply accept a higher tax rate on the sale, rather than rushing the process, cutting corners and potentially undoing all of the hard work involved in getting exit-ready.

That being said, with well over a year until the rate of CGT chargeable on Business Asset Disposal Relief rises to 18 per cent, there is still time for owners to take steps to expedite their exit, without unduly rushing the sale process.

Assemble transaction team
A key step in any sale process, and even more important to get right when hoping to expedite the sale, an owner should engage a strong team of professionals. Experienced M&A advisors, legal counsel, accountants and tax advisors will all play important roles.

A strong transaction team will also involve clearly defined roles and a set timeline with deadlines for key milestones (such as due diligence and entering negotiations) and the role each professional plays at each stage.

Have documentation ready to go
Having collected 3 – 5 years’ worth of audited and reviewed financial statements, owners should ensure that these and other documents - legal documents such as contracts, leases, IP filings and litigation history, operational information such as employee agreements and process documentation – are organised and ready to be reviewed.

A virtual data room (VDR) is a secure and highly-efficient method of compiling and organising documentation and ensuring that it is ready for potential buyers to inspect during a due diligence process. With due diligence times on the rise and predicted to be a major challenge to M&A in 2025, owners can play a major part in facilitating a quick and thorough process and eliminating many potential delays.

Due diligence review
A due diligence review conducted with an M&A professional can enable an owner to identify and anticipate potential issues that a buyer might flag up during their own review – whether legal, operational and financial.

Steps can then be taken to resolve these issues, such as settling disputes, paying debts or correcting compliance issues. If issues can’t be fixed immediately, then the vendor will still be able to anticipate buyer concerns, prepare responses and highlight steps that can be taken to resolve them, improving the transparency of the process and increasing trust between the parties.

Develop marketing strategy
A strong marketing strategy will enable vendors to identify, prioritise and target their preferred choice of buyer – whether strategic, financial or individual – and prepare to contact them accordingly.

Vendors should also prepare material to help facilitate a dynamic and efficient marketing process, such as short one-page teasers to spark interest, offering memoranda demonstrating value drivers, industry position and growth opportunities and official paperwork such as NDAs and exclusivity agreements.

Leverage pre-qualified buyer pool
Owners can also take steps to engage potential buyers before the business is even listed. Numerous very serious strategic buyers across a wide range of UK sectors are often on the lookout for off-market opportunities and tapping into this class of buyer can help to secure an extremely quick sale.

An M&A advisor can be crucial in engaging buyers early and screening them to ensure they have both the financial capacity and interest to close a deal quickly.

To make the process even more streamlined, owners can develop and utilise standardised templates for purchase agreements, helping to reduce complexity in negotiations.

Streamline negotiations
Along with due diligence, negotiations can be one of the biggest drags on a swift sale process. At a time when there are such stark divisions between buyer and seller expectations, this is an even more prevalent concern.

While there is no way to ensure completely smooth negotiations, there are steps sellers can take to streamline the process and minimise the risk of delays. The most important is to enter the process with clear parameters and to respond to inquiries quickly and accurately.

Clear parameters does not mean a concrete, inflexible asking price. Rather, owners should have a clear, accurate valuation of their company and then, around this, decide on an acceptable price range and deal terms. This will help to prevent excessive haggling during negotiations by making the vendor’s position clear to potential buyers and enabling the seller to quickly spot parties that are not prepared to meet their terms.

This firmness is important, but so is flexibility. Within reason, sellers should also be open to facilitating a deal that works for serious bidders and be flexible on deal structure, for example, earn-outs, phased transition and financing options. An unwillingness to make any compromises whatsoever could lead to an owner missing out on a strong buyer.

Address transition and handover
For a buyer in an M&A deal, post-acquisition transition is arguably the most important stage of the transaction. With earn-outs and other similar deal structures increasingly common, moreover, it is often also in the seller’s interest that the business quickly performs well post-sale.

Sellers can help to facilitate this, while simultaneously making the business more attractive to potential buyers, by addressing how the transition and handover of the business can take place. A detailed succession plan, outlining how steps such as knowledge transfer and training will occur, can provide an actionable roadmap for the transfer of control.

Beyond this, owners can ensure a smoother transition by taking steps to ensure key personnel stay post-sale. This will mean keeping key staff in the loop during the sale process and, potentially, offering incentives for their continued employment.

In a similar vein, securing agreements with customers and key suppliers pre-sale (and informing them of major developments) can maintain crucial relationships and facilitate a smoother transition.

Key takeaways
1) These steps are only worthwhile for a fully exit-ready owner and business

2) Proper preparation is the best way to prevent bottlenecks and delays in closing M&A deals

3) Strong communication and co-ordination with potential buyers, key stakeholders and employees is critical to
keeping the momentum of a sale going and ensuring transparency throughout the process

4) Engaging the right professionals early on will help to ensure an efficient, error-free sale process

5) A fast, seamless sale after a rigorous pre-sale preparation can help owners to maximise value and minimise friction and delays

6) A sale-ready business and an owner who is prepared for the process of selling the business is attractive buyers and can further enhance value

Tax efficient alternatives to a third-party sale

If a third-party sale is not possible (or preferable), then there are a number of other possible succession structures and workarounds that can help owners to exit without incurring a hefty capital gains tax bill.

Employee ownership trust
In an increasingly tough exit environment, Employee Ownership Trusts (EOTs) have become established as one of the most popular exit options for owners. While typically involving a significantly lower upfront fee than a third-party sale, an EOT sale enables an owner to pass ownership on to a trusted team, preserving jobs and maintaining the company’s culture and ethos, often while retaining a significant stake in the business.

Another upside of selling to an EOT is that such an exit can offer considerable tax advantages with regards to CGT. Under a government initiative to encourage employee ownership, qualifying EOT sales are eligible for 0 per cent CGT.

In order to qualify, the employee ownership trust must acquire a controlling interest in a trading company and meet the “all-employee benefit requirement”, which requires that the EOT holds a controlling stake in the company for the benefit of all eligible employees.

A sale to an EOT also offers the advantage of being more straightforward than a management buyout (MBO) or third party sale, as well as being quicker than the latter due to the familiarity employees have with the company.

There are of course drawbacks, such as a lower purchase price, the risk of passing a business onto a team that may lack management experience and the loss of control for stakeholders remaining with the business. For companies with a strong management team, an MBO may also be a more appropriate succession structure.

However, the tax advantages for owners are highly attractive and, given the fact that an EOT provides employees with a controlling stake and the potential incentive of tax-free bonuses, it can lead to a highly motivated workforce and a successful post-deal transition.

Given the potential upsides and the heightened tax burden that outgoing business owners face, employee ownership trusts could become even more popular over the coming years. Indeed, accountancy firm Hillier Hopkins recently stated: “Given the erosion of BADR, we have already seen considerable interest in EOTs and expect that to accelerate in 2025.”

Invest gains for tax deferral
Business owners can defer and potentially reduce CGT on the sale of their business by reinvesting the proceeds into schemes such as the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS).

Under EIS, returns from a business sale can be deferred by reinvesting in qualifying companies within three years before or one year after the sale. The CGT on these returns only becomes payable once the EIS shares are sold, or if they cease to qualify. Additionally, any growth in value of the EIS shares is tax-free after three years and investors receive 30 per cent income tax relief on the amount invested.

SEIS offers even greater tax incentives, allowing business owners to permanently exempt 50 per cent of reinvested gains (up to £200,000) from CGT. If the SEIS shares are held for at least three years, any future gains are entirely tax-free, and investors also receive 50 per cent income tax relief on their investment.

By combining EIS and SEIS, business owners can significantly reduce or defer their tax liabilities, benefit from income tax relief and potentially generate tax free gains.

Gifting shares
Discussing the new tax environment, Hillier Hopkins also asserted that the gifting of company shares “will be a key cornerstone of succession and exit strategies for family-owned businesses in 2025.”

An owner can gift shares in a trading or holding company, providing it is the donor’s personal company, and claim either full or partial holdover relief to prevent CGT being charged on some or all of the capital gain. While this is typically seen at family-owned businesses, with shares being gifted to family members, they could also be gifted to key employees.

However, relief is not automatic and the gifting of shares is typically classed as a disposal for CGT purposes, even if no money changes hands. In this case, the CGT will be calculated based on the market value of shares at the time they were gifted.

Holdover Relief is a tax mechanism that enables owners to defer paying CGT when gifting qualifying business assets, such as shares in a trading company. Instead of the donor paying CGT at the time of the gift, the gain is effectively "held over" and transferred to the recipient, meaning they inherit the shares with the original cost basis of the donor, deferring the CGT until the recipient sells the shares in the future.

The relief is essentially designed to prevent tax becoming a hurdle to the succession of acceptable assets, ensuring that a dry tax charge does not arise that makes the “gift” financially unviable.

To qualify for Holdover Relief, the shares must be in an unlisted trading company (or certain listed trading companies where you own a significant stake), and both the donor and recipient must agree to claim the relief through HMRC. The relief is especially beneficial when gifting shares to employees, as it reduces immediate tax liabilities for the owner while enabling employees to gain ownership. However, recipients should be aware that they inherit the deferred CGT liability, which will apply when they eventually sell the shares.

Purchase own shares
In certain circumstances, a company can buy shares from a shareholder, enabling them to exit without requiring a third-party sale or other internal succession. However, strict conditions must be met in order to reduce or avoid CGT.

In a share buyback, the money paid for the shares is treated either as capital (therefore subject to CGT) or income (subject to income tax). If it is treated as a capital disposal, there are certain CGT reliefs and exemptions that the vendor may be able to access.

Firstly, to qualify as a capital transaction (rather than income) the deal must meet the following HMRC conditions: the sale must result in a substantial reduction in shareholding (remaining shares must not exceed 75 per cent of the original shareholding); the deal be for the benefit of the company’s trade; the seller must have owned shares for at least 5 years prior to the sale (3 if inherited or received from a spouse); the seller must not retain significant influence – such as directorship or voting control – following the sale.

The acquiring company should also have sufficient cash reserves to enable them to acquire all of the relevant shares in a single transaction.

Capital treatment can result in several tax advantages, with CGT payable on the difference between the sale price of the shares and their base cost. For vendors who qualify for BADR, the CGT rate can drop to 10 per cent for gain up to £1 million.

However, if the conditions are not met, the buyback will be treated as income and subject to income tax – which can be as high as 45 per cent, making the transaction far less tax-efficient.

HMRC will closely scrutinise transactions of this sort to ensure that they are being carried out for legitimate commercial reasons, rather than simply for tax avoidance. As a result of the complexity of the rules and the close scrutiny authorities will apply, it will be essential for owners to seek professional tax advice prior to attempting such a transaction. Owners can also apply for advance clearance from HMRC to provide more certainty before proceeding.

Double-up BADR
Another potential workaround that can enable owners to double the BADR that they qualify for during their exit is to share ownership of the company with a spouse prior to a sale process.

Under UK law, each spouse qualifies for an individual BADR lifetime limit. Providing certain conditions are met, this can help to reduce the tax burden during a business sale by doubling the BADR available on the transaction.
Spouses can qualify for BADR if they hold a minimum stake of 5 per cent in the company and have been a registered employee or officer of the company for at least two years prior to the disposal of shares.


A higher tax burden is set to be an uncomfortable reality for UK owners selling their companies over the coming years. However, there are steps that can be taken to minimise the amount of CGT they pay, maximise their BADR and ensure a more profitable exit.

A word of caution, though, these workarounds are often highly complex and can attract rigorous scrutiny from tax authorities. For that reason, owners should exercise extreme caution when approaching their exit in this way and seek expert professional guidance.

It is also vital to bear in mind that, if such an exit isn’t feasible, then the likely tax gains are not worth the significant risks (and potential legal ramifications) of ploughing on regardless.

The same applies for owners considering accelerating their sale to lock in a more favourable BADR rate prior to the two upcoming increases. For owners who are ready to sell, then a swift, professional sale process can help them to close a successful deal prior to the April 2026 deadline.

For others, however, the focus should be on conducting a thorough pre-sale preparation process over the next 3 – 5 years, building revenue, maximising efficiencies and making their business a more attractive and valuable proposition to potential buyers. The gains from such an approach will far outstrip any potential tax savings in a rushed sale.

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