Owner/managers tired of swimming against the tide of cut-throat competition, low margins and high costs have a chance to put their troubles behind them.

From April 6 the rate of capital gains tax (CGT) an owner/manager pays on the profit from selling up is being reduced from the full 40% higher rate down to 10% – providing the business has been owned for two years.

The move was announced in the chancellor’s Pre-Budget Report last November and stems from the government’s Enterprise for All initiative.

Acquisition and divestment specialist David Garrick Ltd, which has interests in construction and timber, believes the changes are ‘a very exciting development’, which many owner/managers were not exploiting.

Founder Geoffrey Dalton said: ‘It is an area that an awful lot of owner/managers are not aware of and I think that’s because they are concentrating on running their business.’

‘In the £1-35m range, activity went very quiet before Christmas and now it has picked up. When you consider the tax an owner/manager pays – probably the higher rate 40% income tax, plus national insurance and other costs – 50% or more overall – 10% looks very attractive.

Serial entrepreneurs

‘I think we could see an era of serial entrepreneurs – people setting up a business, paying themselves a nominal salary and driving it hard for several years before selling it and walking away with most of the profit. This is what it’s designed to do. The chancellor knows rewarding people will create the businesses that drive employment.’

Paul Holohan, chief executive of mergers and acquisitions specialist Richmond Capital Finance, said: ‘We have seen a big increase in enquiries for those wishing to sell up.

‘The cost of investment is frightening many people off. Lack of family succession further emphasises this and encourages a desire to cash in on the wealth the owner has created and is locked in the business. To balance this, we have also seen a large increase in those wishing to acquire.’

Business experts believe that assets changing hands will bring wider benefits to industry, such as rejuvenating tired businesses and encouraging investment.

CGT taper relief was introduced in 1998. It reduces the amount of tax due on a gain from the sale of shares in an unlisted company the longer an asset is held. Taper relief for 40% taxpayers will be reduced from April 6 to 20% on gains held for more than one year and 10% on assets held more than two years.

Mike Cochrane, a tax specialist with mid-market corporate financier the Tenon Group, warns about keeping an eye on ‘the taper clock’.

‘The taper clock is aptly named: it can start, temporarily stop, restart, be reset to zero and run fast or slow. There are several instances in which owners of shares might presume they have "clocked up" enough time to fully qualify for the 10% rate, but they will be disappointed to find this not to be so,’ he wrote in The Acquirer magazine.

The British Chambers of Commerce, which represents more than 135,000 businesses, is positive about the changes.

Director-general David Lennan said: ‘At last a government has realised that penal rates of capital gains tax stifle business investment and actually lead to a lower tax take. Lowering rates of CGT below US levels is an excellent achievement.’

&#8220I think we could see an era of serial entrepreneurs – people setting up in a business, paying themselves a nominal salary and driving it hard for several years before selling it and walking away with most of the profit. This is what it’s designed to do. The chancellor knows rewarding people will create the businesses that drive employment”

Geoffrey Dalton, David Garrick Ltd

Range of benefits

Phil Curtis, finance director at Close Asset Finance, believes the changes will have a general beneficial effect that touches several aspects of business.

‘It’s great for people with a shareholding. Wealthy people with a pot of gold who just like to invest, or people who like to invest in business with a view to returns, will certainly be turned on by this.’

Selling up, though, might be a priority. In addition to falling margins and the cost of chasing technology, profit warnings are on the increase, business failures are up and the amount that small businesses owe is mounting.

Borrowings jumped 14% last year, according to the Centre for Economics and Business Research. A spokesperson for business information specialist Dun & Bradstreet said: ‘A lot of business took on debt at the beginning of last year, expecting to pay it off with cash earned over the following months. So far that hasn’t come. The next few months could be the straw that breaks the camel’s back.’

Mr Holohan believes the state of the economy is having a dual effect. He said: ‘Low interest rates mean acquirers can buy companies comparatively economically and low profit margins, coupled with the high capital cost of investment and the lower cost of getting out under the new taper relief rules, are encouraging sales.

‘After April 6 both buyer and seller are likely to get better deals, so the vendor will retain more of the sale price or can sell for a lower price and get the same return. Conversely the buyer can obtain more for his money.’

Many purchasers will be looking at acquiring customer lists and making economies of scale. Many people buy companies to acquire turnover, skills and key personnel as part of growth strategies. Mr Holohan said: ‘There is little incremental effect. There will of course be some cost rationalisation with some fixed assets sold and some job wastage is virtually inevitable.’

Grooming for sale

Experts agree it is vital a disposal is well planned and the business is groomed for sale. Mr Dalton said the minimum time for a sale would be about five months and Mr Holohan said the sale should ideally be part of strategy taking perhaps years.

‘First and foremost seek professional advice. It is not an area where most owners have experience whereas a professional adviser on mergers and acquisitions does,’ said Mr Holohan.

‘A lead time of one to two years is best. We also advise that all strategic options be considered rather than taking the first one presented. When buying, acquirers should be clear on their strategy and seek professional advice.’

The Forum for Small Business believes that one of the positive effects of the changes will be felt by family-owned businesses. A spokesperson said: ‘The prediction that three-quarters of businesses will pay the 10 pence rate will help small owners handing down their businesses to future generations.’

But a stampede could bring its own problems. Barbara Murray, a family business expert at Glasgow Caledonian University, said: ‘Succession is like a powder keg. It can start a 25-year war. I’ve seen it happen.’

Tony Bogod, a family firms consultant with BDO Stoy Hayward, said: ‘I find myself working more with feelings than figures. The golden rule is to communicate. You have to bring these things onto the table.’