As a Labour victory looms, fears of a high-tax regime are accelerating businesses’ exit plans. In this blog, Hilton Smythe explores why a “watch-and-wait” approach could cost you if you’re looking to sell up.
Is the general election looming large over your business sale?

If there’s one thing that businesses don’t like, it’s uncertainty. And the impending general election, with its promise of a tax shake-up, has created plenty of that.

The talking heads of the political world have yet to converge on what a Labour victory (an outcome predicted by recent election polls) will mean for the UK’s tax regime: some predict “even more tax misery”, while others expect a more fiscally conservative approach under the watchful eye of the ex-Bank of England economist, Rachel Reeves.

Either way, the Liz Truss and Kwasi Kwarteng era (dubbed “Trussonomics”) provided a vivid lesson in the market’s reactivity to the tax policies of Downing Street’s incumbents: the “mini” budget, which contained £45bn of unfunded tax cuts, sent the value of sterling plunging and interest rates soaring.

And businesses are preparing for more turbulence. Last June, research from Evelyn Partners found that nearly one in four UK businesses with a turnover of £5 million upwards were fast-tracking their exit planning in light of an expected Labour victory and subsequent changes to the tax regime.

“Labour is seeking to position itself as a safe pair of hands, but there remains a cloud of uncertainty over key tax policies”

Labour has, of course, sought to position itself as a safe pair of hands in recent months, with deputy leader Angela Rayner vaguely vowing to “work with business” in a recent op-ed in the Financial Times, and Keir Starmer rowing back on its £28bn-a-year green plan in an attempt to demonstrate fiscal credibility.

The party has also cosied up to big business at its latest business conference in February, promising to kick-start a “skills revolution”, cap the headline rate of corporation tax at 25% for the lifetime of the next Parliament, introduce a new industrial strategy, and provide for a 10-year R&D budget.

Yet, there remains a cloud of uncertainty over other key tax policies, such as Capital Gains Tax (CGT) and Inheritance Tax, that could have repercussions for those wanting to sell their business.

Labour has previously detailed three tax rises that would raise a combined £5.6bn, including a raid on the earnings of private equity firms, taxes on private school education, and cracking down on tax avoidance – a go-to funding mechanism for opposition parties unwilling to touch controversial tax reforms.

However, no clear position has yet been articulated on CGT. In early 2023, the shadow chancellor Rachel Reeves said Labour had “no plans” to increase the rate of CGT, however Angela Raynor subsequently reopened the debate, suggesting a rate increase could feature in the party’s election manifesto.

“Labour’s favourite think-tank, the Resolution Foundation, has suggested hiking CGT and increasing dividend tax”

Despite Labour’s reassuring gestures and its recent support for Sunak’s National Insurance cuts, a Starmer government would inherit far poorer public finances than Blair or Brown did, and will need to raise tax in other ways to fund its social programmes.

Moreover, Labour’s favourite think-tank, the Resolution Foundation, has supported measures such as hiking CGT on shares to 37% and on other assets to as much as 53%, as well as raising dividend tax from 8.75% to 20% – measures that are collectively estimated to bring in around £4bn and that will significantly reduce the value that business owners can cash out on upon selling.

And Labour’s attempts to reform its “high-tax, high-spending” image has apparently done little to comfort businesses: BDO’s survey of 513 C-suite executives in mid-market businesses, published at the end of last year, revealed that more than three-quarters (77%) expect to pay the same or higher taxes following the next general election.

“Bring your business to market now to lock in the current rate of CGT”

While businesses typically adopt a “watch-and-wait” approach in the face of political and economic uncertainty, business owners should aim to get the ball rolling on their exit as soon as possible if they want to lock in the current rate of Capital Gains Tax.  

The annual exempt amount has already been significantly reduced in recent years – from £12,300 in the 2022/23 tax year to £3000 in 2024/25 – as governments lap up the large and growing income from CGT receipts.

What is more, 2024 looks set to be a bumper year for M&A deals, as decelerating inflation, increased business confidence, and significant private equity dry powder stoke investor appetite, making it a conducive environment to bring a business to market.