Well that’s what many business owners should be saying with regard to capital gains tax, inheritance tax and the reliefs around them following the Budget today.
Under any different colour of Government it is highly likely that many of these taxes and reliefs would have changed. Opposition parties have been talking about capital taxes rising to be in line with income taxes (and these also increasing), and if this had occurred the impact on the net value of owning and selling a business could have been extensive.
In the current period of economic and political uncertainty, there is also a combined risk to business valuations with a decline in confidence affecting the appetite of buyers as well as the funders to support transactions.
Let’s look at a few examples:
- Business maintainable earnings (say) £1m, multiple 6, Enterprise value = £6m
- If Entrepreneurs Relief (ER) applies – Net proceeds on sale = £5.4m
- On death if considered a Business Property Relief (BPR) asset the value to pass on to family = £6m
Let’s take an extreme view – if ER and capital taxes move to a higher rate of income tax at 50% and inheritance tax relief is removed for BPR assets what is required to achieve the same results.
- To get net proceeds on sale of £5.4m at a 50% tax rate requires gross proceeds of £10.8m
- To pass down on death a value of £6m if BPR is removed requires a business value of £10m
This requires the business owner to increase maintainable profits to £1.8m or increase the multiple to 10.8 or most likely a combination of the two, all of which require considerable time, effort, planning and a little bit of luck.
Whilst on the one hand this may be considered a highly unlikely scenario – so was Jeremy Corbyn becoming leader of the Labour party…or doing well at the last Election, the potential impact of even moderate changes in these reliefs and taxes would have a significant impact on business/family wealth.
The current funding climate has significant amounts of money available to invest in businesses (with massive amounts having been raised by EIS and VCT funds before the Budget). In addition, a significant number of debt funders have been creating ever-more alternative funding options, and this combination has created a breath-taking range of opportunities for shareholders to make the most of the current low capital taxes.
Business owners should therefore be sighing with relief and discuss with their Corporate Finance Adviser ways of mitigating the risks of doing nothing and hoping that there won’t be changes in the future that could counteract all the effort that they have put in to building up the value of their business.