Business owners urged to ‘cash out’ to beat capital gains rise


Business owners looking to avoid the rise in capital gains tax next April should consider a ‘cash out’ arrangement as an alternative to a hasty sale, according to Clearwater Corporate Finance.

The firm says that for many companies, selling in such a short timescale may not be viable or could result in lower prices. A cash out may be an ideal solution.

As from April 2008, capital gains tax will be applied at a uniform rate of 18 per cent on the sale of a business. This will bring to an end the system of taper relief, under which long-term business owners and shareholders currently pay just ten per cent.

Jon Hustler, partner with Clearwater explains: “Under a cash out, often known as equity release, the business is sold to a new company and the money paid to the vendor comes from a mixture of private equity and debt. The vendor reinvests some of these proceeds in the form of loan notes. Often the management team also buys a stake at this stage.

“For example, an owner may realise 75 per cent of the value of the business but alongside his management team may still retain a healthy majority stake.

Hustler says cash outs are suitable for fast expanding companies with a proven management team and good growth opportunities.

He adds: “Given the changes in capital gains tax next April, many business owners are currently facing a dilemma. Selling in such a short timescale may not be viable or could result in lower prices. For some of these, a cash out may offer an alternative.

“Properly structured, a cash out arrangement can allow owners to have their cake and eat it. They can realise some of their investment in the business and benefit from the current tax breaks while still retaining control of the company.

“The involvement of a private equity house also helps boost the value of the business over the longer term so they receive higher returns when they sell the remainder of their shares in years to come.”