Yet another article appeared in the national press this weekend about the withdrawal of tax breaks for people who sell their business. It is the fifth article in four months and a lot business owners are starting to get very worried.
At the moment if you sell your business for, say, £1 million, then you will usually be able to claim entrepreneurs’ relief which means that you will pay tax of just £100,000 (10%) on the proceeds of the sale. The usual capital gains tax rate is 28% so if entrepreneurs’ relief were to be abolished, your tax bill on a £1 million sale would increase by £180,000 to £280,000. This could have a massive impact upon people’s behaviour.
The first consequence could be that people would be discouraged from starting new businesses. The great majority of people who start their own business hope to sell it one day and if the net proceeds of the sale were to be reduced, they may well decide that the risk of leaving a safe job to become an entrepreneur was simply not worth it.
Many of my largest and most successful estate agency clients started their businesses within the last twenty-five years and have, through their own efforts, created multi-million pound businesses that employ thousands of staff and contribute millions of pounds of tax to the economy each year. It would be tragic if no new businesses like these were to be created in the future.
The second consequence could be that existing businesses might be discouraged from expanding. A great many of the businesses that I sell are sold to people who have created a successful business in one town and want to replicate their success in another. Every one of these business owners must make the same decision – should I stick with what I have already got or should I take the risk of expanding my business further? The tax rate that is payable on the eventual sale price is an important factor in assessing the risk to reward ratio of any future expansion.
The biggest impact, however, will be on people of retirement age who may no longer be able to sell their businesses for enough money to fund their retirement. Instead, they will be faced with an uncomfortable choice between putting a manager in to run the business on their behalf, or accepting a reduced post-tax sale price.
In my experience, putting a manager in to run a business is much harder than it might first seem. Managers have a nasty tendency to become resentful when they are left doing the work whilst the majority of the proceeds go to someone who spends all day on the golf course. This resentment can easily cause the manager to work less hard or less effectively and if they do, the profits of the business will quickly be eroded. This is bad for the business, bad for the former proprietor and bad for the country.
Another problem is that the owner of a business remains liable for all legal and compliance matters relating to their company. A huge fine for an offence such as breaches of the Money Laundering Act, failure to obtain correct details for overseas landlords or failure to protect tenants’ deposits correctly could easily trigger a huge fine which could be enough to wipe out the whole value of a business.
A third problem is that it is almost impossible to retire entirely. A manager however good, will still need supervision and longstanding clients may also insist on dealing with the person that they have always dealt with.
If you are coming up to retirement age therefore, it might be wise to bring your plans forward a little in order to get a sale through before any changes to the entrepreneur scheme can be brought in.
What is happening in estate agency is, of course, just a microcosm of what is happening with the business sector as a whole and many economists and professional commentators agree with my view that the withdrawal of entrepreneurs’ tax relief could do terrible harm to our economy. Small businesses contribute massively to job creation and have been a crucial element in the recent recover in the UK economy so please don’t take our tax breaks away.