For any industrious entrepreneurs looking to sell their business and profit from years of toil, the Chancellor’s forthcoming ‘budget’ has rapidly become one the most highly anticipated – some would say portentous - of recent times. In fact, it’s safe to say that potential changes to Capital Gains Tax (CGT) on the disposal of business assets, and more specifically shares in UK private limited companies, have instigated intense ‘discussion’ across the whole M&A industry.

The current, pre-budget, position is that sale of shares in a UK private company will attract CGT at 20% of the gain. Business Asset Disposal Relief (BADR) is also available for qualifying individuals allowing the first £1m of gain, subject to a lifetime limit, to be taxed at 10% (thus saving £100,000 in tax).

But first, a little history. CGT was first introduced in 1965 by the Labour Chancellor James Callaghan, starting at a rate of 15%. Before this date, capital gains were not taxed at all. In 1980, the rate was then increased to 30% by Conservative Chancellor Sir Geoffrey Howe, but an indexation allowance was introduced so that only gains above inflation were taxed. The next change came from Howe’s successor, Nigel Lawson, who rebased all assets to market value on 31 March 1982 and raised the rate to 40%, aligning it with highest rate of income tax at the time.

This regime lasted ten years until 1998 when Labour’s Gordon Brown replaced indexation with taper relief of 7.5% each year up to a maximum of ten, reducing rates from 40% to as low as 10% on business assets to encourage entrepreneurship.

Taper relief lasted until 2008 when Labour’s Alistair Darling abolished the concept and introduced a flat rate of 18%. He also introduced Entrepreneurs’ Relief which applied a 10% rate to a £1m lifetime limit on the disposal of qualifying business assets. The lifetime limit was increased to £2m by Darling in April 2010, then to £5m by Conservative Chancellor George Osborne in June 2010, and then again by Osborne in April 2011 to £10m.

In 2016, George Osborne raised the CGT rate to 20% before, in 2020, the next Conservative Chancellor - Rishi Sunak - decreased the lifetime limit to £1m while catchily renaming Entrepreneurs’ Relief as Business Asset Disposal Relief.

So, what does this history lesson tell us about the future? Well other than the introduction of the tax itself in 1965, Labour have arguably created a lower tax position for owner managers of UK SMEs who wish to sell their companies each time they have introduced a change. The Conservatives took a run between 2010 and 2016 with the increased Entrepreneurs Limit, but any gains made here were whipped away by Sunak in 2020. Counter to much of the media perception, neither party have universally been on one side or the other regarding this hugely important group of individuals who drive the UK economy.

The important question remains, what might the budget bring? The truth is that it is anyone’s guess; it’s probable that at this precise moment in time not even Rachel Reeves knows - she is likely still warily considering her options. Politically we know that an increase in CGT for entrepreneurs selling their business is not an assault on core Labour voters. However, CGT as a whole only draws about £25bn a year into the treasury, so any reasonable rate change is unlikely to increase the treasury’s income materially - in fact it may reduce it as transactions are delayed. Of course it may, like the VAT on private school fees (which it is widely thought will have a negative impact on the public purse), be used simply as a statement of political intent.

Then again, how does this logic sit with a government that removes the winter fuel allowance, causing significant political upheaval, not to mention public anger, for a reasonably modest saving of £1.4bn?

To add to the conundrum, history tells us that Labour have previously created certain reliefs designed to encourage entrepreneurs when making changes to CGT, and Rachel Reeves has spoken vociferously about building a strong economy and making Britain a place to do business so we may, for example, see further reliefs to counter an increase in the headline rate for non-business assets.

Regardless, one thing is certain, for entrepreneurs, Wednesday 30 October is highly ‘anticipated’.

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Jim Shaw is CEO & Founder of Shaw & Co

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