The chancellor’s move to reform capital gains tax caused outrage among entrepreneurs, while his indecision only added to the mess. GB speaks to three business experts in an attempt to clarify the issue

Selling early

Richard Garrod, a tax expert at international accountants Mazars, explains the situation on selling a business before April and earn-outs:

“If you sell your business and receive cash upfront, and there is a deferred payment after the April 5 deadline, you can still get taper relief on both parts, but will be taxed at 10% immediately. You may want to do this, as if you get a separate cash payment after the deadline, you will be taxed at a higher rate.

However, business owners may have to pay tax before they get the full payment for their business. Also, a lot of deals are a mixture of cash, loan stock and shares, but it is only deferred payments of cash that can attract taper relief. So if you were given shares, which you sell later, you will have to pay 18%.

For earn-outs, HM Revenue & Customs looks at when the deal is made, and you will have to pay tax upfront. However, if the earn-out turns out to be less than expected, you can claim tax back. But if it is more than it was valued at the time of the deal, you will have to pay additional tax at a rate of 18% as it will occur after the deadline. This makes earn-out valuation risky, as if you undervalue it you will have to pay a higher rate of tax.”

Future plans

Neil Pamplin is a tax director at Grant Thornton and works with businesses preparing funding through the g2i programme. We asked him how the new capital gains tax (CGT) rules may affect investors and entrepreneurs:  

“If you are asking me whether in two to three years people will have become used to an 18% tax rate, then I may answer ‘yes’. It is roughly the European average and is lower than income tax and taxes on dividends, so I don’t think it will put off the true entrepreneur altogether. However, I don’t see the entrepreneur’s relief helping, as ambitious entrepreneurs aren’t going to adjust their plans to benefit from a £1m lifetime figure. A sound business plan with strong management and interesting technology will always attract funds.

The story at the margins may, however, have become harder to sell, as angel investors are also unlikely to qualify for a 10% tax rate. This, coupled with the continued restriction of the number of companies that qualify for EIS relief, may affect valuations.”

Staff shares

Philip Fisher is an employment tax and rewards partner at PKF, and an expert on employee share schemes. He explains how they are likely to be affected by the changes in CGT:

“If an employee has shares in the business they work for and then sells them, they will pay CGT on the rise in share value since they acquired them. Prior to the Pre-Budget Report, many employees would pay very little tax on this as they usually wouldn’t have a large stake in the business, and they had an annual tax exemption of £9,200, which, added to business asset taper relief, meant that up to £36,800 of capital gains was not taxed. Then in the Pre-Budget Report it was announced that the allowances would be reduced. Business asset taper relief was scrapped and CGT was set at a fl at rate of 18%.

To qualify for this, you must have at least 5% of the shares in a company and must have owned the shares for at least 12 months. Needless to say, most employees will not have that much equity in a company.“

For full-length articles on capital gains tax involving the experts quoted above, go to:

Richard Garrod http://www.growingbusiness.co.uk/CGT

Neil Pamplin http://www.growingbusiness.co.uk/CGT2

Philip Fisher http://www.growingbusiness.co.uk/CGT3