Small businesses braced for extra capital gains tax burden

The 2024 Autumn Budget included a number of capital gains tax (CGT) announcements, including increases to the main rates. But why will small business owners be feeling particularly targeted?

Small businesses braced for extra capital gains tax burden

Small business owners are picking through the details of Rachel Reeve’s first Budget and not finding much to cheer about. While it is certainly a relief that business asset disposal relief was not scrapped, the staggered increase in the applicable rate – first to 14% next April, then to 18% from April 2026 – will have a significant effect on exit planning.

Let’s look at a case study. Consider a small company with a single director and shareholder. The company has been trading for many years, and the owner has been carefully using profit extraction strategies that allow profits to accumulate in the company once they have taken enough in salary and dividends to utilise their income tax basic rate band. The accumulated profits are at £400,000, represented by cash and liquid investments. The current exit strategy is to realise all investments, then make a capital distribution as part of winding the company up. Subject to various conditions being met, this will be taxed at 10%, i.e. £40,000, leaving the owner with £360,000. This is effectively their retirement pot, as they have little in the way of pension savings.

After April 2026, the tax charge would be £72,000, meaning an in-pocket position of £328,000. That could be enough of a decrease to mean the owner needs to continue trading for a few more years to ensure they won’t struggle in retirement.

In a further blow, succession planning will also be affected by the announcement that unquoted shares will only qualify for business property relief at the 50% rate. Let’s suppose that instead of winding the company up, our owner intends to pass the shares on in the event of their death. Assuming the value is £400,000, inheritance tax could apply to £200,000 (depending on available nil rate bands etc), meaning the beneficiaries would have to find £80,000 – and if this needs to be extracted from the company there will also be income tax considerations.

One potential crumb of comfort is that the IHT change won’t take immediate effect, and hopefully some concessions can be secured if the professional bodies make representations during the consultation period.

The global body for professional accountantsHM Revenue & Customs