In the March 2020 budget, the Government announced a shakeup of entrepreneurs relief, limiting the tax break available to those selling their business from £10m to £1m over a lifetime. For business owners, the change to Entrepreneur’s Relief increased the amount of tax paid by businesses sold at a profit of over £1m.

Notwithstanding the significant change made by the Government, there have been growing signs to abolish Entrepreneur’s Relief completely or to change the capital gains tax regime. Rumours were rife that further changes would be implemented in October when the chancellor announced the Autumn Budget.

No autumn budget

Last week, the Government postponed the budget scheduled for this autumn because of the coronavirus pandemic. The plan is to instead release a budget early next year. As such, Entrepreneur’s Relief will remain intact and available to use and the capital gains tax regime will remain the same. There will no doubt be a sense of relief amongst business owners who feared that their remaining tax break upon sale of their business would no longer be accessible.

So what does this actually mean for business owners?

If the rumours around the Government's plans to abolish Entrepreneur's Relief in the near future are true, the postponement of the autumn budget may provide a window of opportunity to consider the best way to exit from your business, whilst utilising the £1m lifetime allowance for capital gains relief.

The next step will be to consider which exit option to use. JMW regularly advise entrepreneurs in relation to the legal aspects of their exit, and we have summarised the key options below:

(1) Open Market

This is often the most attractive option upon retirement for small businesses; where a business owner puts their business up for sale with a view to achieve what the company is worth to them. If the market conditions are right and a profitable business is up for sale, the business should attract buyers and sell quickly. However, the obvious drawback is that finding the right buyer at the price you wish to sell at can be a long and sometimes unsuccessful process.

(2) Trade Sale

A trade buyer will often already be operating in the same industry or sector and will therefore wish to buy your company to either enhance their position on the market or provide them with an instant foothold in a marketplace that has been otherwise unobtainable. The pros of this exit option are clear. Having someone already familiar with your sector may make the process of selling easier, with then in turn makes the due diligence process easier. A strategic buyer may also pay far more for your company than what it would be worth to anyone else. This can however depend on the existing client base agreeing to a change in ownership, who may consequently seek to terminate their contract.

(3) Private Equity Investment/Partial Exit

This involves an external investment into the business from a private equity (“PE”) firm. A PE firm will typically want to acquire the business but on the condition that the business owner retains partial equity after the sale, thus acquiring the ‘partial exit’ label. This is to ensure that the business is able to continue and grow successfully with their knowledge and experience at the forefront This would be an ideal option for business owners that are heavily involved in the day to day operations of the Company but do not wish to give up ownership/control of their business entirely at that point in time.

(4) Liquidating

This is the ‘close up shop’ option and typically involves selling all of the assets of a business. A business can be wound up very quickly this way but will usually have the lowest return on investment to the business owner(s). Liquidating could also be considered as an option to re-organise the company so that somebody else can operate it thereafter. Care needs to be taken when liquidating a company to ensure that favourable tax treatment is received.

(5) Management buyout (“MBO”)

An MBO involves the management team or individual purchasing the business they have been involved in from the owner(s). The management team will typically use bank loans, private equity and/or personal resources to fund the acquisition. The main benefit of a MBO is the continuity of leadership before and after the sale, which will typically motivate the staff to work hard to make the business succeed.

(6) Employee Ownership Trust (“EOT”)

Where you do not wish to sell to a third party, an EOT may be the best all-around option. EOTs involve transferring a majority stake of the Company to a trust. This can be 100% of the shares, but must always be more than 50% of the shares. This majority of the shares will then be held in trust for the benefit of its staff. Employees will then have a share in the direction, success and profits of the company going forward through the trust. They will also be entitled to receive certain bonuses without being charged income tax and thereby create a ‘savings culture’.

EOTs are also very tax effective. The amounts that business owners receive for selling their shares will not be subject to corporate gains tax. This provides a greater tax saving than that provided by Entrepreneurs Relief.

Tax: to pay now or defer?

It may also be prudent to consider paying off any tax owed now, to capitalise on the available relief, rather than deferring the liability to a later date, which may see business owners subject to much higher tax rates. It would be advisable to discuss any outstanding tax liabilities with a tax advisor.

JMW and exit options

We anticipate that there will be some urgency to sell businesses now to take advantage of the available tax break, which may be abolished altogether next year as part of the next budget. If you are also considering the same, we are more than happy to work with you, your tax advisor and your corporate finance advisors to determine the right exit option for you, at the right time.

For any advice on any of the above exit options, and whether it is right for your business, please contact JMW Solicitors on 0345 872 6666 for further information.​​​​​