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CAPITAL GAINS TAX: WHY SELL NOW?

BY ELIAS PAOUROU, QUANTUMA ADVISORY LIMITED

WHAT IS SUSTAINABLE INVESTING?

BY MHA CARPENTER BOX

Capital Gains Tax:

why sell now?

For many businesses, the last few months

Finance have caused enormous challenges and depending on the sector you operate in, these may either have been insurmountable or the consequences of recovery will be felt for many months to come.

We are helping businesses in these situations all the time, through accessing Coronavirus Business Interruption Loan Scheme (CBILS) funding, restructurings or accelerated disposals.

However, there are many businesses who have retrenched, refocussed their cost bases and either maintained or, in some sectors, seen revenues grow as the economy changed. For some, this will be a temporary benefit, whilst for others this may well be a step change that allows them to embark on growth in a new market economy post Coronavirus (COVID-19).

Putting your plans on ice

Selling your business as the world comes out of lockdown might seem like flight of fancy, especially with the news constantly telling us that the recessional consequences of lockdown will be on a historic scale. Who would even want to buy your business anyway and surely, anyone who would, is not going to pay the price that they might have paid in January?

Of course, there are always buyers in any market, but headline prices are under pressure, even amongst businesses that have performed well during the pandemic.

So that’s simple then. For anyone selling their business your plans are now on hold. COVID-19 won’t be here forever and you can ride it out for a couple more years, postpone your retirement plans and that trip of a lifetime. Sorted. Or is it that simple?

Are Capital Gains Tax (CGT) changes coming? And how might it impact your plans?

On Monday 13 July, the Chancellor of the Exchequer, Rishi Sunak, sent a letter to the “Office of Tax Simplification”. In it, he requested a review of Capital Gains Tax (CGT) with a view to making it simpler and smoother to use for those interacting with it. Namely, those entrepreneurs who have spent their business lives growing their company and see it as their future retirement fund when they do finally sell.

At the end of a few short paragraphs Rishi noted, “I would be interested in […] how gains are taxed compared to other types of income”. For all business owners, these few words are potentially dynamite.

Most didn’t expect that the short paragraph in the Conservative’s December manifesto to review CGT

On the 1st August Quantuma merged with AIM listed K3 Capital Group Plc in a deal worth up to £42m.

The merger will enable Quantuma to continue, at pace, to grow its diverse professional services offering with enhanced capabilities in restructuring, corporate finance, tax advisory, forensic accounting and expert witness services.

Quantuma managing director, Elias

Paourou, said: “This is a significant milestone for both K3 and Quantuma. The combination of high quality businesses will provide an independent and compelling proposition in the mid-market.

“Demand for Quantuma’s services is already high and we anticipate this gathering pace as the government withdraws its Covidrelated financial support. Becoming part of a listed plc will enable us to take on more significant mandates and provide greater access to larger corporates, both at home and overseas.

“It is very much business as usual for Quantuma. We will continue to develop our cross-border capabilities and are in advanced talks with a number of lateral hires to further strengthen our UK team.”

Elias Paourou

would come about within three months, but it did, and in the March Budget the lifetime allowance for Entrepreneurs’ Relief was slashed by 90%. This brief letter therefore is a warning siren of a potential to bring the taxation of capital gains in line with income. In other words, a potential increase from 20% capital gains tax (after the first £1 million of gain) to 45%.

Of course, there are no crystal balls here, and a return to the early 2000s and Taper Relief depending on length of ownership, would surely need to be factored in somehow for longterm business owners? However, the Government’s willingness to act quickly in a buoyant economy in March is fair notice that change is coming potentially as soon as the chancellor sits down after delivering his speech in October.

In many respects, the chancellor has few levers to pull here given existing manifesto pledges regarding incomebased taxes and VAT rates, but with spending during the pandemic at unprecedented levels, tax rises are inevitable for the near term. Whilst increasing CGT from 20% to 45% may not yield the largest windfall for the Treasury, aligning income and capital rates produces an uplift in tax receipts whilst being seen as a simplification of the complex world of tax legislation.

Come the Autumn Statement then, your tax bill on selling your business may more than double and do so overnight.

So, for those businesses who have survived and even thrived during the first half of 2020, undertaking a disposal now may see that the value erosion caused by the pandemic may be more than compensated for by a saving in CGT (if acted upon now). But time is of the essence. There are many active buyers out there; there is competition between them; they are making allowances for the fact that trading dips are only temporary and are focussed on how you are coming out of lockdown, rather than what happened during it. Yes, your headline price may be a little lower than it might have been in January, but you may net more proceeds into your pocket by exiting now, rather than waiting for the world to ‘return to normal’ after this pandemic. Equally, as an owner manager, you may be exhausted by the challenges of business over the last few months and have started to think about a different future for your business, for yourself and for your family.

Take good advice, early

The key to all of this is good advice. Our Corporate Finance team has decades of experience in advising business owners like you through all manner of transactions and navigating you through your options.

We work closely with business owners and shareholders to understand their exit options, as well as buyers who have registered via our Interested Parties Database looking for opportunities to make acquisitions.

Get in contact with your local Quantuma contact to understand how we can help you with clear, objective and empathetic advice.

Elias Paourou

Managing Director Quantuma Advisory Limited Direct: +44 (0)1273 322400 Mobile: +44 (0)7553456456

37 Frederick Place, Brighton, BN1 4EA Elias.Paourou@Quantuma.com

www.quantuma.com

What is sustainable investing?

You may have seen the terms

Finance ‘Sustainable

Investment’ or ‘Socially Responsible investment’ (SRI). These are both ways of describing the criteria a professional Fund Manager will use in order to screen out or select the companies they invest in within the fund they manage.

In recent years, investors have increasingly been demanding that their money is invested in ways that reflect their values. There is a realisation that a large number of small investors can drive companies to take steps to improve the environment and make a positive impact on society. However, investors also want to see a positive return for their investment. Sustainable – or SRI investing – aims to achieve both of these things.

Forward thinking

In the past the perception has been that funds that invest taking account of ‘values’ rather than just financial data would not perform as well as a fund that did not have the same restrictions. The view was that by avoiding sectors like oil the potential for growth would be reduced. However, there is a growing realisation that behaviour which wastes resources or is unethical is likely to lead to poor financial outcomes. For example companies: • Who have caused pollution • Have been less than honest about their product • Not treating their clients data with the care that they should have

In this context, it seems reasonable that investing in companies with high standards in these areas could eliminate some of these potential risk factors. It therefore makes sense for investors worried about losing money on their investments.

Many investment professionals talk about Environmental, Social and Governance (ESG) factors when selecting companies to invest in. Examples of these factors are:

Environmental

• Climate change • Resource depletion • Waste • Pollution • Deforestation

Social

• Human rights • Modern slavery • Child labour • Working conditions • Employee relations

Governance

• Corruption • Executive pay • Board diversity and structure • Political lobbying and donations • Tax strategy

Fund Managers will often consider ESG factors to screen out or positively identify companies for investment. They do not necessarily choose companies which are completely perfect in every area (this might leave them with a very brief shortlist). However, the hope is that the additional oversight of the Fund Managers will encourage good behaviour and drive improvements in the business, leading to improved returns for investors, and improvements in the environment and in society.

Learn more about Sustainable Investing in our latest podcast.

If you are interested in investing in a way which better reflects your values and would like to consider this further, please get in touch with a member of our team 01903 534587.