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Leighton Reed WALES’ TRADITIONAL FAMILY BUSINESSES ARE “THE LOSERS”

Owners of small family-run firms in Wales who are considering selling their businesses had better do so before next April to avoid being hit by a punishing tax bill, a tax expert has warned.

For years a traditional feature of the Welsh economy, small family firms could be the real losers of Chancellor Alistair Darling’s recent decision to level out capital gains tax across all assets, according to Broomfield & Alexander director Leighton Reed.

Whilst entrepreneurs such as property owners are gleeful at the new rate of 18% they will be paying on a gain of capital, any family-run businesses in Wales which was set up more than 25 years ago will be paying almost double the amount of tax they would have paid previously unless they sell before April next year.

Broomfield & Alexander estimates there are about 27,000 businesses in Wales which employ fewer than 10 people, and say many could be affected by the new ruling.

“Most long-standing family companies could have relied upon a 10% rate of tax upon the exit of their business, and yet most property investors would have expected a tax rate of between 24% and 40%, with a rate of 24% only achievable after 10 years of ownership,” said Mr Reed.

“From April next year, all assets attract a flat rate of 18% - a change which was meant to hit the private equity players hard. But because of the way in which private equity gains are computed, most were only paying an effective 5% tax rate and now they will pay only 10%.

“The “losers” will very definitely be the family companies which have been in existence since before 1982. Because of the way in which the tax bill is worked out, if the family sell their business after April 2008, then they pay 18% tax on a larger figure. The 10% tax charge is computed on a smaller figure. The effective increase in the tax rate is not simply 8%, but potentially much higher, because indexation allowances and the ability to substitute original cost for the value of the business in March 1982 are to be abolished from April 2008.”

Mr Reed said the issue could potentially be mitigated because the Government may introduce a tax-free band into the equation, meaning that an anticipated first £100,000 of profit from the sale would not be taxed.

“If this does happen, it will mean some consolation for smaller firms, since many will be sold for small sums, so a higher proportion of the profit on the sale will be free of capital gains tax.

“But the message is simple: if you’re thinking about selling your business, then you need to act now or face at least an 8% hike in tax rates.

“We would strongly recommend that business owners take professional advice in this area – if they do decide to get the sale in before April next year, things will be tight enough, so expert guidance is critical to avoid mistakes which could delay the deal.”

Podcast intro

A Government decision to level out capital gains tax from April means that small businesses in Wales are going to have to consider the timing of any sale if they do not want to have to pay a higher tax bill, according to Broomfield & Alexander director Leighton Reed.

Whilst entrepreneurs such as property owners are gleeful at the new, lower rate of 18% they will be paying on a gain of capital, Mr Reed says one class of well-established, traditional Welsh business stands to be particularly hard hit, and if considering a sale at the moment, needs to take advice swiftly - Click here to download this podcast

To contact Leighton directly please call him on 029 2073 9428 or email him at Reedl@broomfield.co.uk

Date:3rd December 2007