Exit Planning, Business Valuation, and Capital Gains Tax

For UK SME owners, exit planning works on a 5-10 year horizon. The decisions made at the start of that window determine the tax efficiency of the eventual exit. Business Asset Disposal Relief (BADR, formerly Entrepreneurs' Relief) delivers 10% CGT on lifetime gains up to £1m. The 2024 Autumn Budget capped IHT Business Property Relief at £2.5m of qualifying assets per individual. Employee Ownership Trusts (EOTs) provide succession with full CGT exemption on transfer. EMI options retain key staff in the run-up. The 2026 CGT rate landscape touched the framework but did not break it.

Business Asset Disposal Relief: 10% on £1m lifetime gains

BADR reduces CGT to 10% on qualifying business disposals up to a £1m lifetime cap:

• Disposal of all or part of a business operated as sole trader or partnership.
• Disposal of shares in a personal company: 5%+ shareholding, employee/director, 2-year qualifying period.
• Disposal of business assets where the business has ceased.
• Lifetime limit £1m of qualifying gains (reduced from £10m in 2020).
• Excluded: residential lettings, FHL post-April-2025, passive investment property.

Above the £1m lifetime cap, gains are taxed at standard CGT rates (24% higher rate on assets, 18% basic rate). For a £2m business sale by a higher-rate seller: first £1m at 10% = £100k tax; remaining £1m at 24% = £240k tax; total £340k vs £480k without BADR.

2026 CGT rate changes

The 2024 Autumn Budget changed CGT rates from October 2024:

Valuing your small business

Three core valuation methodologies for SMEs:

1. 1EBITDA multiple: most common for service and professional businesses. Multiples typically 3-5x for sub-£500k EBITDA, 5-8x for £500k-£2m EBITDA, 8-12x for stronger growth/larger.
2. 2Net Asset Value: applicable to asset-rich businesses (property, equipment, inventory). Value = total assets minus total liabilities.
3. 3Discounted Cash Flow: forward-looking, sensitive to assumptions. Used in larger M&A but less common at SME scale.

For a typical Harrow service SME with £200k of EBITDA, a 4x multiple gives £800k. Add adjusting items (excess cash, owner addbacks, normalised salary). Subtract debt. Result is the equity value the seller can expect at completion.

IHT Business Property Relief: £2.5m cap from 2026

The 2024 Autumn Budget capped Business Property Relief from April 2026:

• BPR was historically 100% on qualifying business assets without monetary limit.
• From 6 April 2026: 100% relief on first £1m of qualifying assets, 50% relief above.
• Combined with similar cap on Agricultural Property Relief.
• Total combined APR/BPR cap: £1m of full relief plus 50% above.
• Target: family businesses with values £2-5m+ where business holdings dominate the estate.

For a Harrow family business worth £4m at the founder's death post-April-2026: first £1m at 100% relief (£0 IHT), remaining £3m at 50% relief and 40% IHT = £600,000 of IHT vs £0 under pre-2026 rules. The reform materially shifts succession planning for SME owners.

Employee Ownership Trusts (EOTs)

EOTs offer SME succession with full CGT exemption on transfer:

• Owner sells controlling stake (50%+) to an EOT for the benefit of all employees.
• CGT on the sale: zero (full exemption when conditions met).
• EOT typically funded by deferred consideration paid out of company future profits.
• Restrictions: bonuses to employees up to £3,600 per year tax-free.
• Trustees: typically include independent professional trustee plus employee representatives.

Preparing for M&A due diligence

A typical M&A due diligence reviews 6 areas. SME owners should pre-empt all six:

1. 1Financial: 3 years of audited or accountant-prepared accounts, monthly P&L, working capital trends, customer concentration.
2. 2Tax: corporation tax returns, VAT history, PAYE compliance, R&D claim history, no outstanding HMRC enquiries.
3. 3Commercial: top customer contracts, supplier agreements, IP ownership, regulatory licences.
4. 4Legal: company structure, employment contracts, property leases, litigation history.
5. 5Operational: management team strength, key dependencies, systems and processes.
6. 6Environmental & social: H&S record, environmental compliance, ESG profile.

Sellers who have been preparing for 12-24 months pre-sale typically extract 5-15% better valuation than sellers responding reactively to buyer questions. The investment in pre-sale tidy-up usually pays back many times over.

Enterprise Management Incentives (EMI) for key staff

EMI options retain key staff in the run-up to exit:

• Eligible companies: trading companies (or groups) with gross assets under £30m and under 250 employees.
• Option grant: company grants employee an option to buy shares at a fixed price.
• Tax efficiency: gain on exercise typically taxed as capital gain (BADR-eligible after 2-year holding), not income.
• Per-employee limit: £250,000 of option value.
• Per-company limit: £3m of options outstanding.

EMI works particularly well 18-24 months before a planned exit, retaining key staff who are critical to the deal value. Granted at a low strike price, the spread to exit value becomes a tax-efficient employee bonus that survives the buyer transition.