The Road to Exit in 2025

Shashi Prashad and Craig Rowlands look at the exit landscape for private business owners in the year ahead. 

As we head into 2025, private business owners will be considering their plans for the year ahead. For some, that will inevitably mean thinking about exit – and potentially going through the process of selling their company.

With the dust having settled following Labour’s first Budget, owners need to understand the impact of some of the Chancellor’s measures on the path to a successful exit.

The increase to capital gains tax (CGT) and reduction in the benefit of Business Asset Disposal Relief were not as material as expected. However, the rise in employer National Insurance contributions (NIC) and minimum earnings will intensify the need to maximise cash tax reliefs.

Meanwhile, limiting the benefit of Business Relief for Inheritance Tax (IHT) on private company shares could affect shareholders’ views on whether to push forward with a sale.

 As ever, preparing for exit will require careful work. And there are some specific actions you should consider whether or not you intend to sell your company.

Some of these could take around 18 months. So the sooner you start preparing, the better the chances that any potential sale won’t be disrupted.

Rachel Reeves increased CGT with immediate effect, though the rise in the higher rate to 24% was smaller than anticipated. As such, it’s unlikely to affect shareholders’ exit considerations either way or the timing of a potential sale. 

That said, you should still be thinking about how to best use the value you’ve created. To which end, we suggest going through the following steps:

• Assess your personal liquidity needs against the potential deal value

A key question to ask yourself is: what proportion of the expected proceeds from a sale would you want to realise for personal use? For example, clearing mortgages, buying a holiday home or day-to-day spending.

In our experience, many founders wish to reinvest a proportion of their proceeds into other business ventures or into property or long-term investment portfolios. 

If that’s the case, then owning a proportion of the shares in your business personally, and the rest in a corporate structure can be more tax efficient than owning the entire shareholding yourself.

That’s due to the potential availability of the Substantial Shareholdings Exemption (SSE). This can exclude companies from paying corporation tax on gains made when selling qualifying shares in certain trading businesses.

There are a number of conditions to be met, however, so seek advice on SSE before progressing. And since there’s a qualifying holding period of 12 months before it can apply, it is better to prepare well in advance.

• Understand the impact of corporate structures on option holders’ and investors’ tax positions

Corporate ownership can be hugely beneficial to founders, but they can have unintended consequences for tax-approved employee share schemes, such as Enterprise Management Incentives (EMI) schemes.

EMIs are a popular way to motivate staff to help grow your business. They offer significant tax benefits for both the company and its workers. A word of warning, though: the advantages for employees can be lost completely if a controlling shareholder transfers shares to corporate ownership. 

Similar risks apply to any tax reliefs that your investors may benefit from under the Enterprise Investment Scheme (EIS). The key message being: always get detailed advice before transferring shares to a corporate structure. 

From April this year, employers’ NIC will rise, while the salary threshold at which they become payable will fall. The National Minimum Wage will also go up.

Meanwhile, the government’s impending Employment Rights Bill proposes measures that will further inflate costs for employers.

To offset these effects and protect operating margins, it’s more important than ever to take advantage of the value levers available within the tax system.

This isn’t a new imperative; it’s simply good tax governance. But it’s become more urgent following the Budget. What’s more, potential buyers of your business will see robust tax governance as an indicator of a well-run company; its absence may result in indemnities and price chips.

You can maximise cash tax reliefs by taking a deeper look at the existing incentives your company may qualify for:

• R&D tax credits allow companies to claim corporation tax relief on the cost of activities considered to be advancing science or technology. They’ve been in place for some years, but claiming them is a complicated process, and easy to get wrong. Plus, you’ll need to steer clear of R&D providers who’ve been blacklisted by HMRC.
• Capital allowances permit businesses to write off certain qualifying capital expenditure during the year in which the investment is made (under HMRC’s new, full-expensing rules).
• The patent box regime reduces the corporation tax rate on profits made by commercialising patented products.

All too often, companies fail to maximise these opportunities, leaving valuable cash on the table. Understanding where your business activities are eligible for these incentives and submitting the relevant claims will be even more crucial as employment costs rise.

Careful documentation of the evidence supporting such claims will be equally important. With HMRC set to recruit a raft of new inspectors, we can expect more enquiries into incentives claims. Errors could prove costly.

VAT and transfer pricing (TP) are two further common sources of tax leakage, where good governance can keep cash in the business.

The UK’s TP rules currently only apply to large corporates, but the government has announced a consultation on modernising them. That could see the threshold come down, bringing many more businesses into scope.

Transfer pricing is a compliance matter, which requires the design, implementation and documentation of suitable policies, processes and controls. But it’s also an opportunity to make sure your corporate structure remains fit for purpose in a rapidly changing global tax landscape.  

The Budget measures presenting perhaps the greatest risks for business owners relate to Business Property Relief in the IHT regime.

The Chancellor announced the end of full IHT relief on shares in private trading companies that are passed on to the next generation. From 2026, only the first £1 million of value will benefit from 100% relief, and the rest 50%.

This means that in the event of the unexpected death of a business owner, the next generation will face a significant IHT bill if the company shares pass to them.

As those shares are often the most valuable asset the family owns, a sale could well ensue in order to fund the IHT liability (especially if using taxable dividends isn’t a possibility).

Planning for this scenario is therefore crucial and there are potential solutions. Shares can, in most circumstances, still pass tax-free to a spouse. And where that isn’t an option, life assurance can be an effective way to protect your family.

All the same, many founders who were set on passing their business to the next generation are deciding that selling up is now the best way to leave a legacy for their family.

It’s therefore imperative that you consider your potential IHT position – whether or not you’re on the road to a sale. Review your will and life assurance. Being proactive will ensure, as far as possible, that your family and your business are safeguarded.

In summary, the most pressing advice we can offer private business owners is: start preparing now.

Give yourself time to carry out tax diligence; consider the relevant legal considerations; and structure your business and shareholdings properly ahead of a sale.

Doing the necessary work to prepare for sale can take around 18 months.

Even if your sale is more imminent, some of the actions we suggest could still be completed in time, so we recommend taking early advice on what’s possible.

KPMG’s multi-disciplinary team works with entrepreneurs to enhance business value, mitigate risks and achieve successful transactions.

We combine deep, technical tax and legal expertise with global reach. We can help you make the appropriate arrangements for you, your business and your family.

Throughout the process, we’ll maintain a constructive relationship with HMRC on your behalf. And we’ll help prepare you for a tax advisor’s due diligence in a data room for three years post-exit.

Start preparing today to secure the best outcome for your family and your business. Contact us to help you navigate these challenges and prepare for a seamless exit.