The Tax Bill on Selling Your Business in 2025

The Autumn 2024 budget delivered an unwelcome, though not entirely unexpected, increase in Capital Gains Tax (“CGT”). This policy change has had immediate and expensive ramifications for Britain’s small and medium-sized enterprise (“SME”) owners, particularly those planning to sell their businesses. If that’s you, then it’s crucial to understand the implications and review your exit strategy accordingly.

The New Tax Landscape

CGT has risen significantly with immediate effect:

• The lower rate has increased from 10% to 18% (an 80% hike).
• The higher rate has risen from 20% to 24% (a 20% increase).

Business Asset Disposal Relief (“BADR”), previously known as ’entrepreneurs’ relief’, has survived the cuts, but with a higher tax rate. While the lifetime limit of £1 million for executive shareholders with holdings of more than 5% remains intact, the tax rate on these gains will increase incrementally:

• From 10% to 14% as of April 2025.
• Then from 14% to 18% as of April 2026.

Whilst the increase is less severe than some had feared pre-budget, it still poses challenges for business owners navigating their exit strategies. Yet, despite the higher tax burden, selling your business remains a viable way to unlock capital and achieve your desired exit and the rates are still much less than income tax.  Below, we have outlined some key scenarios to illustrate the financial impact of these changes. Employee Ownership sales are still at 0% CGT although it is hard to see how even this rate can remain.

Impact on Medium to Large Business Sales (the Calculations)

Consider an entrepreneur selling a business valued at £10 million. Assuming the use of BADR on the first £1 million, the CGT owed has increased significantly:

Prior to April 2025:

• BADR on the first £1m: 10% = £100,000. CGT on the remaining £9m: 20% = £1.8m. Total CGT: £1.9m.

From April 2025 to April 2026:

• BADR on the first £1m: 14% = £140,000. CGT on the remaining £9m: 24% = £2.16m. Total CGT: £2.3m.

From April 2026 onward:

• BADR rate increases to 18%, adding another £40,000 to the total tax bill. Total CGT: £2.34m.

The difference of £400,000 post-April 2025 and £440,000 from April 2026 could prompt entrepreneurs to accelerate their sale timelines.

Impact on Small Business Sales (the Calculations)

For SME owners with businesses valued at £3 million, the changes are similarly impactful:

• Prior to April 2025: CGT owed: £500,000.
• From April 2025 to April 2026: CGT owed: £620,000.
• From April 2026 onward: An additional £40,000 increase brings the total to £660,000.

The incremental increases do feel disproportionate for smaller business owners. Many of whom have spent decades building their enterprises and are relying on the cash flow from a sale, as their pensions have often been unfunded in favour of providing cash flow to the business. For some, these changes could influence the timing of their sale and their willingness to remain in the UK. Although long anticipated, these CGT changes undermine the Government’s stated commitment to supporting entrepreneurs.

What’s Next for Business Owners?

Despite the higher tax burden, selling your business remains a viable way to unlock capital and achieve your desired exit. While CGT rates have risen, they are still significantly more favourable than income tax, making the option of a sale still attractive. ‘Time’ wealth for you – and recognising that the capital sum is just as critical as when to exit – becomes a key consideration. Accepting the new tax rates is part of the evolving yet weak economy and knowing when to sell to secure future succession for your business is just as important as the sale itself. Planning ideas include:

• BADR: Ensure that all involved, including potential family members, benefit from the BADR, which can also provide advantages for Inheritance Tax planning and share gifting.
• Holding Company Strategy: One promising approach is creating a new holding company through a share exchange. When executed correctly and with solid commercial reasoning, this strategy can minimise or even eliminate, transactional taxes. If qualifying conditions are met, the sale of the trading entity could be exempt from Corporation Tax (CT), allowing the new ‘ family investment’ holding company to retain and invest the entire proceeds. This structure locks up wealth for the family and secures future benefits.
• Tax Efficiency Post-Sale: With rising CGT rates, the challenge for business owners is to find investments for the sale proceeds that minimise future tax liabilities. Offshore or international bonds present an attractive solution, offering tax-free growth, withdrawals of up to 5% annually without an immediate tax charge, and the ability to assign bond segments to others (e.g. children) at potentially lower tax rates.
• Moving Offshore: Jurisdictions like Italy, Dubai, Guernsey, and Portugal continue to offer appealing avenues for tax planning and wealth management and with allowances still in place for UK residents to spend up to 90 days abroad, you could enjoy these opportunities without compromising family time – plenty of time to visit the grandkids!
• Employee Ownership Trusts (“EOTs”): EOTs remain an attractive option for business sales, especially since the 0% CGT rate still applies (for now). The Government continues to encourage the expansion of the 2,000 employee-owned businesses in the UK. EOTs provide a niche and potentially highly effective means of succession planning.

Final Thoughts

For entrepreneurs considering the sale of their business, the timing is more crucial than ever. The Autumn 2024 Budget has made it clear that the Government is tightening its grip on Capital Gains Tax. Whilst these changes may be challenging, they emphasise the importance of planning and exploring creative exit strategies – especially as the risk of further tax hikes remains. With the right approach and expert guidance, you can successfully navigate this evolving landscape and secure the best possible outcome for your business sale and future. Buyer appetite remains incredibly strong due to the high rewards that smaller and mid-sized enterprises often generate compared with corporate or property investments.

Contact us about Employee Ownership Trusts (EOT)

If you would like more information about our Employee Ownership Trust service offering or recent case studies, please browse our website, Alternatively, if you would be interested in a free consultation with one of AVEOT’s experienced advisors, please call us at +44 (0)1737 240888 or submit the form on our Contact Us page.