Last Wednesday, March 11, the new chancellor of the exchequer of the U.K. did something truly crazy.
And although I’m DEAD AGAINST what he’s done… it provides YOU with a massive opportunity.
I’ll tell you all about it in a moment. But first — what’s he done?
Well, he dramatically changed the capital gains tax rules. Which will really shake up dealmaking in the U.K.
You see, in the U.K. there’s a scheme called Entrepreneurs’ Relief.
Here’s how it works…
If you own shares (more than 5%) in a business — and you’ve owned them for more than 12 months — the government gives you a tax break when you sell them. You only pay 10% capital gains tax.
This scheme was launched in 2008. Over the past 12 years, the total amount allowed has increased to £10 million.
And that’s a lifetime value limit.
You can sell one business for £10 million or 10 businesses for £1 million. Either way, you would only pay 10% tax on that money.
So £1 million capital gains tax on £10 million. Pretty cool, right?
The purpose of this program is to drive entrepreneurship. Starting a business from scratch is risky. (In my opinion, it’s batsh*t crazy.)
The fact is 96% of all startups fail inside of 10 years. If you do survive those odds, there’s an incentive to pay a lower tax when you sell your business.
But last week, that incentive dramatically changed — making the potential returns to entrepreneurs lower.
Now, the risk versus reward for starting a business… growing it… then selling it… is completely different.
All right, so that’s what happened. But how did we get here?
Well, after the Conservative Party gained back a massive number of seats in the snap election last December, Prime Minister Boris Johnson started a Cabinet shake-up. One of those changes (which was quite recent) was appointing a new chancellor of the exchequer.
That’s like the CFO or finance director of U.K. LLC.
The new guy’s name is Rishi Sunak. And like all executive hires, he wants to make his mark quickly.
Let me explain…
A member of Parliament since 2015, Sunak previously served as chief secretary to the Treasury.
The U.K. prepares a budget twice per year, once in November and once in March. The spring budget is a chance to course correct on financial planning (taxes, spending, etc.)…
But Sunak has done something so dramatic — and stupid — he’s going to drastically reduce the amount of entrepreneurship in the U.K.
He reduced the lifetime cap by 90% — from £10 million to only £1 million.
Then he did two MORE absolutely crazy things…
First, he announced the date for this change would NOT be April 6 (the start of the new financial year, when all tax changes usually go into effect).
Instead, the change went into effect immediately — March 11, 2020, the date of the announcement. Which is totally and utterly stupid!
People had NO time to plan, respond or pivot. If you’re buying a business NOW and had a signed letter of intent (LOI) or heads of terms in place BEFORE March 11, then the seller can still get the tax relief.
BUT — and this brings me to the second (technically, third) boneheaded thing Sunak did…
Sunak is considering retro-taxing people on the difference they made selling a business ABOVE the new £1 million cap.
I don’t know what he’s smoking… That is just completely nuts. What if sellers have spent or invested those proceeds already? Will he litigate to get his retro tax? Bonkers.
And the impact this will have on potential entrepreneurs is devastating.
For two reasons…
- Wannabe business owners will think twice before starting a business… now that the rewards (after tax) are lower.
- Many startup and growing businesses are funded by investors (venture capitalists, angel investors and crowd-funding platforms) and a BIG chunk of that capital is invested by people who have sold businesses… paid tax… and now want to reinvest that money for further capital gain. Those funds will also shrink.
So why has he done it?
I think it’s a combination of THREE things …
He’s just stark raving mad… he wants to exert his power and make his mark because he’s the new guy… and he’s taxing entrepreneurs to generate additional tax monies to fund remedies to contain and support the response to the COVID-19 pandemic…
Also last week, Sunak announced a £12 billion (that’s BILLION with a B) emergency fund for public services and support for small businesses to trade.
And he expects £3 billion of that will come from taxing entrepreneurs — by scrapping Entrepreneurs’ Relief above £1 million and potentially retro-taxing previous sellers.
Now, I’m not a medical professional and I don’t know enough about coronavirus to comment… but I do know business. And taxing the heartbeat of the economy — the small-business owner — is NOT the way to go.
Here’s an idea…
Make Amazon, Starbucks and other global businesses pay their fair share of U.K. tax rather than hide behind complex corporate structures to legally evade it. (In 2019, Amazon paid only £14 million in U.K. tax on almost £11 billion in U.K. revenue.)
Now, despite what Sunak has done, there are two MASSIVE opportunities here for you…
Number one — if you were on the fence about STARTING a business versus BUYING one instead, this should make you jump off that fence like an Olympian.
The risks of starting a business are already VERY high, and now the rewards are shrinking. Don’t do it. It’s foolish, dangerous and could destroy your life. Instead, BUY a business using other people’s money.
Number two — this issue will bring considerably more businesses to market looking for buyers. I suspect many small-business owners will take stock and figure there’s no point in continuing to grow their business now that the tax benefit has been effectively removed.
So I guess this move isn’t all bad…
You can still be an entrepreneur. And you can still start a business…
But make it a dealmaking business — YOU Inc.
Tons of existing profitable businesses will flood to market this year, which will drive down valuations thanks to the simple economics of supply and demand.
So get your deal-origination funnel greased and ready… there is plenty of opportunity on the horizon.
Until next time, bye for now.
Editor and co-founder, Dealmaker Wealth Society
P.S. Sourcing small-business deals is an ongoing process… which is why it’s critical your deal-origination pipeline is running on all cylinders.
Click here to get a copy of my book Zero-Down Business Buying Secrets. Learn how to build your own deal-origination machine and keep it fuelled with a constant stream of high-quality opportunities.