Winners and Losers - Businesses

Whilst much has been said recently about fat cats in Private Equity firms and presumably the new CGT rate of 18% is aimed primarily at them it will also affect true businessmen/entrepreneurs who will effectively suffer a hike in their potential tax rate on a sale or winding up of their business of 80%. We see many new business start ups and over the years some have failed.  The very nature of a new family business or similar start up is that the proprietors are taking a commercial risk and the tax rate under business asset taper rules has apparently been there to incentivise them as their ultimate reward on sale or winding up will only suffer tax at what most would believe to be an acceptable rate - 10%. Most businessmen would recognise this risk and reward equation.

Many will immediately think that a sale now would be beneficial in that the 10% rate would apply but depending on the figures in some instances a sale post 6 April 2008 would be more beneficial.

So what should business owners do now?

• If contemplating a sale look at the figures of tax pre and post 5 April 2008.
• If contemplating an exit through winding up can this be achieved prior to 6 April 2008 - i.e. has the business assets that need to be disposed of and will there be sufficient time to do so.
• Has a sale already taken place where the vendor is now holding loan notes - review what the tax implications will be on a ‘sale' of those notes both now and after 6 April 2008. There is nothing to suggest how these would be dealt with in the Press Release so action may need to be deferred until draft legislation is made available or further guidance is issued.

There has certainly been a shifting of the goal posts and the rewards from taking business risk will be lower in the future. Without wishing to make political comment  will this affect the UK's economy? On the other hand property investors have been given a tax break - their lowest possible tax rate (for a higher rate tax payer) has just dropped from 24% to 18%. The same applies to second home owners who are higher rate payers - will this fuel the housing market further?

Advice to all is to review your potential tax position on a sale of a business or indeed a personally held asset and then plan accordingly. Of course tax is only one aspect and in the business world there will be many other considerations which need to be taken into account in arriving at an action plan. Just because it is a good time to sell from a tax perspective does not mean it's a good time to sell from a commercial perspective to maximise rewards! 

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