Some UK founders are rushing to sell their startups ahead of the Autumn Budget in October amid worries that tax increases could lower the value of an exit further down the line.
With UK finance minister Rachel Reeves ruling out increasing taxes like income tax, national insurance and VAT in the upcoming Autumn Budget on October 30, many believe that capital gains and inheritance taxes are the most likely to go up.
There are fears that changes could impact Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) which currently sees founders pay 10% tax on exit takings of up to £1m and 20% tax on business assets over that threshold.
Several are taking drastic action. “We’re working on a deal and trying to get it done before the budget announcement,” one fintech founder — who didn’t want to be named, like all of the founders quoted in this piece — tells Sifted, adding that they’re trying to “accelerate” the process because of potential capital gain tax increases. “I’m petrified that the news isn’t going to be good.”
“The signalling regarding potential changes to tax and incentive regimes is already unsettling many,” says Stephen Chandler, partner at Notion Capital. “I am aware of a few UK founders actively exploring exits ahead of the budget rather than focusing on ongoing independent growth.”
A fair price to pay?
Many in the tech sector argue that a lower rate of tax on proceeds from a business sale (in comparison to income tax, which is 40% or more for salaries over £50k) is just reward for taking the risk involved in launching a startup.
“If there’s no upside, what’s the point?” says one founder of a wellness startup. “I may as well get a job with a big firm and get a big fat salary.” They tell Sifted that they’re also “really trying to push through a sale” ahead of the budget.
Other founders have told Sifted that they’d consider relocating their companies abroad, should capital gains taxes increase substantially.
Chandler says he knows of “several founders and investors actively exploring relocation overseas” in the event of big increases to capital gains tax.
One deeptech founder tells Sifted that the loss of entrepreneurs’ relief could make them consider moving abroad. “Entrepreneurs’ relief has been amended regularly over the years, but it remains the major tax incentive for people to found a business,” they say. “If [a founder] is aiming to build a business worth hundreds of millions of pounds, a reduction in entrepreneurs’ relief would be a strong incentive to emigrate.”
Another founder, from the healthtech sector, tells Sifted that they would consider relocating if the tax burden on an exit rose above 25%. They showed Sifted a recent message from their accountant, which said that relocating was an “option”, adding that they have clients in Dubai, Portugal and Cyprus for “tax planning reasons”.
Entrepreneurs are increasingly reaching out for tax advice on relocating overseas, says Angela Wood, managing director at tax consultancy ETC Tax. She tells Sifted that the number of enquiries about relocation have doubled or tripled in recent months.
While Cyprus and Malta remain popular destinations, “overtaking all of those perhaps is the UAE, in particular Dubai,” Wood says. “As well as being very attractive from a tax point of view, [it] has also invested heavily in real estate, infrastructure and technology to attract overseas investors and business owners.”
Labour’s tech moves
Concerns mounting over increases to capital gains tax follow a mixed few months on the tech front for the new UK government since it came to power in July.
In August, the government came under fire from startups who told Sifted they’ve been wrongly asked to pay back thousands of pounds in tax credits, and there have been reports the UK could look to limit immigration for tech jobs — which many say would hurt the sector. The government also announced it was axing £1.3bn in AI and tech funding.
But an extension to the EIS programme — which is designed to give tax breaks to investors who back new companies and will now run for a further 10 years — was seen as good news. Investors and founders are also hopeful that projects like state-owned energy company GB Energy will bring new funding and revenue opportunities for startups.
For many tech folk, however, the biggest litmus test on whether or not the UK’s new Labour government is tech-positive is still to come.
“It is critical to the Government’s ambitions for increased investment and growth that the UK maintains its attractiveness and competitive edge for both entrepreneurs and investors,” says Chandler.
Read the orginal article: https://sifted.eu/articles/founder-startup-sale-budget/
