As we know, in her recent budget, the Chancellor added a further 4% on the rate of CGT charged on the realisation of gains on shares held in private companies. She also announced that Business Asset Disposal Relief (BADR) will become increasingly less generous with tax rates up from 10% to 14% in April 2025 and then to 18% in April 2026.

It’s fair to say that these changes, along with upcoming changes to Business Property Relief, aren’t being particularly well received by the community of entrepreneurs that drive the UK’s SMEs, commonly referred to as the engine room of the country.

There was hope, and I must admit to being one of the hopefuls, that Rachel Reeves would follow in the footsteps of her Labour predecessors and extend a tax break for entrepreneurs. In amongst a wider headline rate increase I was hoping for an improvement in BADR or similar (see my pre-budget article), but alas no.

However, I do think that the rate change will make a lot of owner mangers think about if they want to pay CGT at all. Yes. CGT is optional.

Let me explain…

If we take a typical sale scenario for one of our clients. An individual shareholder sells a business for £20m. They wish to spend £3m of their consideration immediately; for example, to buy a new house, holidays, cars etc. The client also calculates they need £300,000 per annum to live on. This is then increased by 2% for inflation each year, being the Bank of England’s long-term target. The client’s objective is to create long term generational wealth with the remainder of their capital.

They have two options:

Option 1

Sell the shares that they hold and bring the £20m to CGT at 24% benefiting from BADR at 10% on the first £1m. All money is then in their personal ownership ‘tax paid’ and can be invested and spent as the client wishes.

Option 2

Insert a holding company and sell the resulting subsidiary retaining the shares in the new top company, receiving the £20m into a corporate shell relying on substantial shareholders relief to avoid tax on the sale and taking into tax only amounts required by way of dividends.

I have assumed an investment return before tax of 6.57% split 4.0% growth and 2.57% income with 30% of the growth realised and taxed in each tax year. These numbers can be argued but they are consistent across the two options. Also assumed is that tax rates remain as they are today.

Under Option 2 our client would, after ten years, have assets in the corporate entity of some £3.6m (+21.5%), more than they would have under Option 1. After 20 years this gap increases to £5.1m (+22.4%). This is not a trivial difference and is one which will continue to accelerate as time goes on. Take this out to 30 years and under Option 1 our client has £31.6m and some £39.4m to their name under Option 2.

The reason this works is the difference between investing net and gross of CGT. Under Option 2 the initial pot is protected and, to help, income is taxed in the corporate at 25% (not 45%) and the CGT rate is now within 1% of the corporation tax rate. This is before they look at various reliefs the corporate might be able to secure which could further lower its tax bill (such as 0% on dividend income or interest relief on investment loans).

Granted, if the client wants to access the capital in the corporate, then tax will need to be paid at dividend rates, but many clients will be happy with the long-term tie-up and will see the power of the gross investment strategy.

This strategy is commonly known as a Family Investment Company (‘FIC’) and can have added benefits where the FIC is set up in a similar manner to a trust, allowing for long-term preservation of capital amongst a wide group of ‘beneficiaries’.

There is a point where the difference between the initial capital, the day one spend and annual income requirements are all too close, and the benefit actually flips to suffering the CGT on the sale. Also, any new holding company will need to be in place for 12 months to be safe, so thinking needs to be done well in advance. Of course, the devil is in the detail and the above should not be considered tax advice and you must seek assistance from a qualified professional fully briefed in your specific circumstances before taking any action.

So, my point is, depending on your objectives, income requirements and deal value, you may choose to pay no CGT at all on the sale of your company.

‍

Jim Shaw is CEO & Founder of Shaw & Co

‍

If you'd like to discuss how Shaw & Co can help you sell, buy or fund the growth of a business, please book a meeting here

‍