Gary Venner, CEO of IFA Acquisitions, analyses the announced budget and the impending impact on selling IFAs
The Chancellor of the Exchequer, Rachel Reeves, delivered her first Budget yesterday; an event that was momentous in several ways, not least for being the first Budget from a female Chancellor, and the first budget from a Labour Government for 14 years.
Whilst the projected £40bn increase in the tax take is momentous, many of the changes did not come as a surprise due to leaks and extensive forecasting of the proposals in the press over recent days and weeks. However, we were left dangling until the budget was presented on the exact percentage changes that come into effect.
What were the biggest fears for sellers pre-budget?
- Business Asset Disposal relief being removed or changed
Business owners will be relieved to know that Business Asset Disposal Relief remains, giving a 10% rate of tax for now, but rising to 18%, on lifetime gains up to £1m, subject to meeting criteria.
However, for vendors looking to sell in the short-term the wisest course would be to consider their options now! Relief will be diminishing with ratcheting up rates of taxes on the first £1m for the following tax years:
- 2024/25 staying at 10%
- 2025/26 increasing to 14%
- 2026/27 increasing to 18%
Therefore, within only 18 months the tax payable on the first £1m of BADR will have risen by 80% on the current rate of relief. Completions are possible before the 5th of April 2025! We urge you to contact your broker and get initial discussions with Acquirers underway to keep you from losing out under the impending higher rates.
- Capital Gains Tax increasing in line with marginal tax rates with top rates of 45% on gains
Initial talk of equalising CGT with income tax proved wide of the mark with the higher rate ‘only’ increasing from 20% to 24% for gains on or after 30 October 2024. The lower rate increases much more significantly from 10% to 18%, meaning that it is almost the same as the basic rate of income tax. These changes seem particularly odd as we have returned to having the same rate of tax for all gains, including second homes, which flies in the face of the recent policy of taxing gains on second homes at a higher rate.
Therefore, whilst any tax rise is unwelcome on gains from the sale of a business which is often deemed to represent a type of retirement fund when selling a firm, vendors late on completing and exchanging prior to the budget will be relieved as the rate increase will not be as punishing as originally thought.
This rate change takes place with immediate effect, so will be used for all future gains above the £1m BADR threshold or where the gain doesn’t meet BADR criteria.
- Further tax increases affecting IFA business owners:
Business Property Relief / Inheritance Tax
Currently BPR and APR can each provide unlimited 100% relief from IHT. From April 2026 there will be a combined limit of £1m for 100% BPR and APR, qualifying assets over that limit will only attract 50% relief. AIM listed shares will also attract 50% relief from IHT.
This means that business owners will no longer have the unlimited 100% relief from 40% IHT where they continue to run their trading businesses, and this can represent a real concern for family run businesses which pass down the generations in having to find a substantial IHT tax bill of 20%.
Pensions / Inheritance Tax
Reeves announced she was closing the “loophole” that gives pensions preferable IHT treatment. She will bring unused pension funds and death benefits payable from a pension into a person’s estate for IHT purposes from 6 April 2027.
This policy has long been considered low hanging fruit for a government in search of cash. Many more people will now be “dragged into paying inheritance tax” because pensions will be counted as part of their estate.
Employers NI /Wage Increases
Carrying on running businesses will have a higher tax take from PAYE in the form of Employers NI. Minimum wage is increasing by minimum 6.7% and as much as 18% for Apprentices.
- The minimum wage for over 21’s, known officially as the National Living Wage, will rise by 6.7%, from £11.44 to £12.21 from April 2025. For someone working full time, or a 37.5 hour week, that equates to £23,873.60 a year, up from £22,368.06.
- For 18 to 20-year-olds, the minimum wage will rise from £8.60 to £10 – 16.3% increase. This means someone on a 37.5 hour week would earn £19,552 a year, up from £16,815. However, only a minority of people in this age group do work full time.
- Apprentices will get the biggest pay bump, from £6.40 to £7.55 an hour. – 18% increase That means their annual wage will go up to £14,762 from £12,513 at the moment.
The Treasury said a big hike in the minimum wage for under-21s – the largest on record – marked the first step towards a single rate for all adults.
The single largest tax raising measure is the changes to Employers’ National Insurance Contributions bringing in an extra £25bn by the end of this parliament. Not only will the rate increase from 13.8% to 15% from April 2025, but the threshold above which contributions are payable will decrease from £9,100 to £5,000.
The current Employment Allowance gives employers with NI bills of £100,000 or less a discount of £5,000 on their employer NI bill. From 2025, the Employment Allowance will rise to £10,500. Moreover, the government will expand the Employment Allowance by removing the £100,000 eligibility threshold so that all eligible employers now benefit. This means that for firms with less than 4 staff being paid a minimum wage are likely to be cost neutral or better off but for larger firms will see a big increase on taxes paid on their salary bills. Coupled with wage increases and Employers NI increasing this is likely to force more employers to consider AI capabilities – perhaps something not wholly appreciated by the Labour party.
Over recent weeks this rate increase has been the subject of both great ‘speculation’ and significant debate about whether it would be in breach of a manifesto promise not to increase taxes on working people. Clearly significant funds are needed to pay for the government’s agenda, but it is hard to argue that the change is not a tax on working people – directly on owner managers but also by putting salary increases at risk and by the risk of price rises as employers seek to maintain margins.
Overview
Labour’s spending had to come from somewhere and the big fund-raising taxes are those that Labour promised not to increase, albeit they are happy to hide behind their smoke screen that increasing Employers NI and other taxes mentioned above is not directly related to working people! Hard choices indeed.
The chancellor argued that “the only way to drive economic growth is to invest, invest, invest”. It’s difficult to see which of the policies introduced in this budget will lead to more sustainable investment. Ms Reeves was unrepentant and warned it would be ‘irresponsible’ to rule out further tax rises in the coming years!
Prior to the budget we forecasted a lull of IFA sellers post budget, however we are forecasting the opposite with an increased interest in selling within the next 6 to 18 months. With CGT not rising anywhere near as much as first feared and BADR still available we know this will be welcome news to the high number of IFA business owners at or nearing retirement age (believed to represent around one third of advisers in this age group) who will want to explore options to sell.
Get in touch now!
Reap the rewards of your years of dedication and hard work! If you are considering selling your IFA business, we advise starting the process now to keep from losing out under impending higher rates.
Our highly knowledgeable and experienced team of industry professionals are on hand to support you. If you would like advice or clarity on how any of the changes announced might impact you or your organisation, contact us for a free and no-obligation consultation.
Contact us on IFA Acquisitions or Call Us on 0208 0044 162