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OCTOBER BUDGET - Implications for Business Owners

Yesterday (30 October 2024) as you know Rachel Reeves delivered her much awaited first Budget.

The big headline in terms of tax increases was, of course, the rise in employer’s NIC to 15% and the lowering of the level at which it applies, which together with the increase to the minimum wage adds significant costs to businesses.

A sigh of relief was breathed that the main rate of CGT will rise (from Budget day) “only” to 24% rather than coming close to income tax as had been feared. This will presumably mean that lots of business owners who were considering going abroad for tax reasons may not feel compelled to do so now. Strangely, the residential property rate of 24% remains unchanged although the SDLT surcharge on buying second properties will increase today so this area didn’t completely escape.

Regarding anyone who sold on an unconditional contract before Budget day they have introduced similar anti-forestalling measures that we saw in March 2020. Usually, the date of disposal for CGT purposes is the date of the unconditional contract, not completion. Under these measures, where any purpose of the split exchange and completion was fear of CGT rising the operative date for tax purposes will be completion instead. Clients in this situation should take advice.

The business asset disposal relief rate will rise from 10% to 14% from next tax year (6 April 2025) and 18% the tax year after (6 April 2026), so it will end up not materially less than the main rate. This will no doubt mean that people with smaller gains will try and ensure that deals are done by 5 April 2025, although the saving would only be £40k so it may not result in the mad rush we have just seen. For the rest of this tax year, BADR at 10% will save up to £140k of CGT (as compared to CGT of the main rate of 24%), from next tax year it will save £100k and then from April 2026 onwards only £60k. This is compared to when BADR was at its height for the years up to March 2020, when the maximum tax saving was £1 million.

There are some quite radical changes to the relief for sale to Employee Ownership Trusts – business owners can sell to an EOT tax free as long as certain conditions are met. Having held a consultation process that closed in Autumn 2023 there were a number of recommendations and some of these will now become law. Notably:-

• Trustees will now need to be UK resident so that where there is a “disqualifying event” after the period in which this would fall back on the seller (see below) there are real tax consequences (a deemed disposal by the trustees, who if UK resident will pay UK CGT with no credit for the amount they paid for the shares). So, this will mean that UK CGT is now always payable by the trustees on a disqualifying event in that period (where previously, gains would have escaped where there were non-UK trustees);

• The period when tax will fall back on the seller if say the trustees cease to have control (or there is another disqualifying event) will now be four tax years after the year of sale, increased from one;

• The trustees will now need to be independent meaning that 50% or more of them are not “excluded participators”.

All of these seem designed to ensure that EOTs are used only where there is a real desire for employee ownership and to stop the situations where shares were sold to an EOT as a first stage before selling on to a third party buyer fairly shortly after.

There is also now to be a requirement that the trustees of the EOT have taken all reasonable steps to ensure the price paid for the shares in the company is no more than market value and that where any consideration for the disposal is deferred, and interest is payable, the rate of interest is no more than a reasonable commercial rate. This is what trustees should have been doing anyway (not least because under the terms of the EOT they would not have been allowed to benefit the selling shareholders) although the requirement to take all reasonable steps may create a more onerous obligation than trustees may otherwise be used to.

EOTs have become increasingly popular as an exit route in the last few years with around 1,400 private companies being EOT owned by the end of 2023. Even with these changes, EOTs should always be considered in exit planning although traditional buy outs certainly have their place too and in many ways are much more workable. Interestingly the new rules do not propose a cap on the size of gain that can be tax free so EOT relief will still work for any size of gain.

A blow to family shareholders will be the change to business property relief from IHT where now the relief will apply only to the first £1 million of value with the rest relieved at 50% meaning in effect a 20% tax bill on passing on family company shares on death. It remains to be seen how descendants are supposed to fund the tax as the whole point of this relief in the first place was to avoid forced sales of companies on death. Business owners should take estate planning advice as to how this development may change their current planning as there is time - the measure will be effective from April 2026.

Finally, no changes were made to EIS and SEIS so these will remain popular, in particular the CGT free exit now saving tax at 24%. These should be considered on every company start up and every fund raise.

Please do get in touch if you have any questions.