Potential Changes to Capital Gains Tax Under a Labour Government: Implications for Business Sales

14 Jun 2024

As the 4th of July election approaches, business owners are closely monitoring the potential changes that a Labour win could bring, particularly regarding Business Asset Disposal Relief (BADR) and Capital Gains Tax (CGT). While the Labour manifesto does not specify any immediate changes to CGT, there is considerable speculation that they may align CGT rates with income tax rates and eliminate certain tax incentives like BADR in the future. Understanding these potential changes is crucial for business owners contemplating selling their businesses and may cause them to consider expediting their timelines.

Current Landscape of Business Asset Disposal Relief and Capital Gains Tax

Under the current system, BADR allows qualifying business owners to pay a reduced CGT rate of 10% on gains from the sale of their business, up to a lifetime limit of £1 million. This relief is significant, providing substantial tax savings compared to the standard CGT rates, which can be as high as 20% for higher-rate taxpayers.

Potential Changes and Their Implications

If Labour aligns CGT rates with income tax, additional-rate taxpayers could see CGT rates increase to 45%. Removing BADR would eliminate the 10% relief, leading to a substantial increase in the tax burden on gains from business sales.

Example Scenarios

Timeline for Potential Changes

While the Labour manifesto does not outline specific timelines for these changes, or that they will even take place, tax policy adjustments typically take time to implement. However, should Labour win the election, it is plausible that changes could be introduced in the following financial year, potentially as early as April 2025. This timeline suggests that business owners have a window of opportunity to act before any new regulations come into force.

Ideal Time to Start the Sale Process

Given the possible tax implications and the typical duration of the business sale process, which commonly takes 9-12 months, it may be advisable for business owners already contemplating a sale to expedite their plans and begin the sale process as soon as possible. Ideally, starting the process within the next three months would provide a sufficient buffer to complete the sale before any potential changes are implemented in 2025. This could result in significant tax savings and a more favourable financial outcome.

Conclusion

The potential changes to Business Asset Disposal Relief and Capital Gains Tax under a Labour government could have a substantial impact on the financial outcome of selling a business. While the exact timeline and nature of these changes remain uncertain, the prudent approach for business owners is to stay informed and for those already considering a sale, think about starting the sale process promptly to take advantage of the current tax regime. Acting now could mean the difference between a manageable tax bill and a significantly higher one, preserving more of the hard-earned value of their business.

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