Many entrepreneurs will try to sell up before April, when changes that will make this process less advantageous for many come into force, accountants have predicted.
In his Pre-Budget Report last week, chancellor Alistair Darling announced that from April 6 2008, capital gains tax taper relief would be replaced by a flat rate of 18%, a rise from 10% for most small firms.
As a result, accountancy and advisory firm Deloitte has predicted a significant increase in the number of entrepreneurs looking to sell their businesses before April.
The accountants pointed out that, while many entrepreneurs see 10% as an acceptable cost on an exit, a rise to 18% may significantly affect the decision of whether or not to sell. An entrepreneur with a business worth £5 million would face an additional tax cost of £400,000, for example.
Sam Hart, director of entrepreneurial business at Deloitte, commented: “On the face of it, the change in the capital gains tax (CGT) rate increases significantly the rate of tax on a sale of a business.
“Given the proposed increase in CGT rates, it is likely that we will see a short term flurry of activity in the sale of entrepreneurial businesses.
“The critical thing will be to make sure that the right price is achieved; a low price, albeit with a favourable tax rate won’t help.”
However, Hart said that those who have held business assets for less than two years would benefit from the flat rate of 18%, and that the changes would bring greater clarity and certainty for some.
He added: “Frequently, entrepreneurs expect to pay 10% on the sale of their business, only to find that due to the complex changes in taper relief since 1998 the actual tax rates are higher.”
© Crimson Business Ltd. 2007