Labour Government Budget deflates Business Asset Disposal Relief

The small print of The Autumn 2024 Budget contained a particularly nasty surprise for the millions of Britain’s SME owners who are hoping to sell their businesses one day.

Despite the Budget stating that the ‘government is committed to creating a positive environment for entrepreneurship and will work with leading entrepreneurs and venture capital firms on how policy supports that, including the role of the existing tax schemes’, it is impossible to see how this commitment holds true, once the details are laid bare.

Firstly, we have the headline rates of Capital Gains Tax being immediately increased from 10% to 18% for the lower rate (up 80%), and from 20% to 24% (up 20%).

Let’s look at the impact of this tax rise on sellers of medium to large businesses.

Take a serial entrepreneur who has used up her CGT relief allowances already and has built an enterprise to 8 figures in revenue and £2 million of EBIT. Let’s say she accepted an offer to acquire the business at £10 million outright, the CGT on this would have been £2 million pre-Budget.

As of 30 October 2024, CGT in this instance will now be £2.4 million. The 20% rise in CGT will reduce her net take from £8 million down to £7.6 million.

The impact on sellers of small businesses

Rachel Reeves announced: “Alongside these changes to the headline rates of Capital Gains Tax, we are maintaining the lifetime limit for Business Asset Disposal Relief at £1m to encourage entrepreneurs to invest in their businesses.“

Oh well, isn’t that good news? Not so fast. Let’s look at the text of the Budget.

There are two reliefs which offer access to a lower rate of CGT: Business Asset Disposal Relief (BADR), and Investors’ Relief (IR). The rate for both BADR and IR will increase gradually, to give business owners time to adjust to the changes. The BADR and IR rates will rise to 14% from 6 April 2025, and will match the main lower rate of 18% from 6 April 2026.

So what we have is a 40% increase in the tax rate applying to the first $1,000,000 of disposal proceeds for qualifying business owners in April 2025, and an effective 80% increase in the tax rate applying to the first $1,000,000 of disposal proceeds for qualifying business owners in April 2026.

Let’s look at the case of the owner of a small business who has built it up over the past 20 years and has never claimed any Entrepreneur Relief or BADR. His lifetime allowance of £1m is therefore intact. For simplicity’s sake, we’ll ignore the £3k personal allowance.

The SME owner gets an offer of £1.5 million for the business.

Before the Budget, he would have paid 10% on the first £1m and 20% on £500k, a total of £200k CGT, leaving him with £1.3m net.

Selling the business today instead, he pays 10% on the first £1m and 24% on £500k, a total of £220k CGT, leaving him with £1.28m net.

If he waits until April 6th 2025 to sell, he pays 14% on the first £1m and 24% on £500k, a total of £260k CGT, leaving him with £1.24m net.

If he waits until April 6th 2026 to sell, he pays 18% on the first £1m and 24% on £500k, a total of £300k CGT, leaving him with £1.2m net.

The difference between selling before the 2024 Budget and after 6th April 2026?

A whopping 50% increase in the government’s tax take.

In the meantime, employers are also hit with a rise of 1.2 percentage basis points on their National Insurance contributions for staff, with the threshold salary upon which NI has to be levied lowered from £9100 to £5000. The smallest of businesses will, however, benefit from having their annual employment allowance increased from £5,000 to £10,500. Should any business be paying staff the minimum rate, then from April 2025 they will have to increase wages by 6.7% for over 21s to £12.21 per hour and by 16.3% for those aged 18 to 20, from £8.60 to £10 per hour.

Many UK business leaders are unhappy that the changes announced in Rachel Reeves’ first budget as Chancellor of the Exchequer will target entrepreneurs and business owners and the very people who help to grow the economy.

Certainly, the Budget was always going to be restrictive on business owners, and there is no doubt that more pressure has landed on business owners to navigate careful business strategies under the new tax landscape.

Chris St Cartmail, who is a Director of Business Sale Report and a certified exit planning advisor, said today: “This Budget will set a couple of trends in motion. Firstly, a tougher and more inflexible regime for hiring and firing is not conducive to fast growth in businesses, whose labour requirements ebb and wane in cycles. The most affected of these businesses will go to the wall.

Secondly, there will be inevitable calls from business advisers to urge clients to go to market before April 2026, if not before April 2025. Some of those clients will end up selling before they are properly exit-ready, and the CGT savings they are targeting will be far less than the additional value they could add by pursuing a de-risking and value acceleration plan implemented over a couple of years, alongside smart tax minimisation strategies.

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