Navigating higher capital gains tax rates and the impact on business exit strategies

As expected, Labour party Chancellor Rachel Reeves, announced in the Budget on 30 October 2024, an increase in Capital Gains Tax rates. 

Previously individuals who sold certain assets or a qualifying trading business could be eligible for a reduced CGT rate of 10% on gains falling within a £1m lifetime allowance. Whilst the £1m allowance has remained the same, any gains realised from 6 April 2025 will be subject to a CGT rate of 14%, and 18% rate from 6 April 2026. The timing of when an individual disposes of their business will therefore have a significant impact on the resulting tax liabilities. 

For qualifying gains in excess of £1m, the applicable CGT rate was 20% but this has been increased to 24% with immediate effect (from 30 October). 

Business wind downs

Whilst the increase on gains in excess of £1m has already taken effect, the incoming increase on the rate applicable to gains below £1m will have an impact on any business owner looking to wind down their company and withdraw their retained earnings after April 2025, whether this is for retirement reasons or following a sale of the business.  A cost-effective approach in certain circumstances is to use a solvent liquidation. The company’s debts are paid in full, and the liquidator makes capital distributions to shareholders which are subject to beneficial CGT rates, subject to specific Target Anti-Avoidance Rules.  In contrast, if a liquidation is not used, the return of funds are treated as income up to a top rate of 40%.  

If you have been considering this course of action or perhaps are in the process of winding down your company already, it may be worth thinking about the timing of when you’re likely to receive funds.  

Business sales and restructuring

The change does not just impact companies in wind down. For those who are looking at selling or restructuring the ownership of their business (perhaps for family succession reasons), the change in CGT rates will make such a disposal or restructure more expensive for the seller, due to the increased tax rate paid on returns.   

Whilst the budget has not directly impacted the underlying value of businesses, the increase in CGT could force sellers to hold out for higher business valuations to compensate for the higher tax burden. This will potentially deter buyers or extend the timeframe of sale, indirectly making the buying and selling of smaller companies less attractive.  

The new higher CGT rates are likely to disproportionately impact smaller family-owned and closely held businesses, where the owner’s personal tax situation is intertwined with the business.  For example, tax payable on gains of under £1m may nearly double (from 10% to 18%) compared to a much smaller proportionate increase on larger gains (from 20% to 24%).  

If you would like to understand more about winding down your business, the value of your business or the possible implications of selling the business or transferring it within an existing shareholder or family group, please contact James Hopkirk, Tom Wacher or a member of the team at Kreston Reeves.