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The Mergers & Acquisitions (M&A) market post budget

Chancellor Rishi Sunak’s first budget last year saw Entrepreneurs Relief replaced by the Business Asset Disposal Relief, resulting in a reduction of qualifying gains from £10m to £1m. Consequently, all eyes in the M&A market were drawn to potential changes in Capital Gains Tax (CGT) before last week’s budget.

A review of CGT by the Office of Tax Simplification (OTS), commissioned by Sunak last year, proposed numerous changes. The headline recommendations included CGT to be brought in-line with income tax and for the personal tax-free allowance of £12,300 to be reduced by £2,000-£4,000.

A collective sigh of relief is likely to have accompanied the Budget announcement that the rate of CGT would remain unchanged, for now.

Pre-budget, the concerns regarding a potential reduction in CGT reliefs for selling owner managed businesses (OMBs) led to a significant surge in deal activity as business owners looked to secure a more favourable rate.

Post-Covid recovery – a time for cautious optimism?

The Office for Budget Responsibility (OBR) is anticipating GDP to grow by 4% in 2021 and 7%+ in 2022. This forecast economy rebound post Covid would certainly benefit businesses growth.

The Budget announcements outlined a series of measures which the Treasury hopes will facilitate the forecast economic growth and recovery at minimal public finance cost. The accuracy of these projections will significantly influence the volume of M&A activity in the next few years.

A stronger macroeconomic outlook underpins business growth and raises confidence amongst investors, making a disposal substantially more likely.

Further, when the wider macro-economic landscape is healthy, debt funders having a stronger appetite to fund potential acquirers.

There is a cautious optimism, should the economy rebound as projected, it may be considered a short term bubble by potential acquirers who will be concerned by inflated valuations. Post 2022, the GDP is forecast to revert to more usual levels of under 2% per annum and business owners will need to be mindful of this when considering the likely market value of their business.

Impact of other Budget announcements

The Budget announcement included a Corporation Tax increase in two years’ time. The new higher rate applies to companies or groups with taxable profits in excess of £250k. The Budget also re-introduced the marginal CT relief band of taxable profits between £50,000 and £250,000.

Additional reliefs for businesses which invest to improve productivity and their performance, such as the capital allowances ‘super-deduction’.  For expenditure incurred from 1 April 2021 until the end of March 2023, companies can claim 130% capital allowances on qualifying plant and machinery investments. The intention is to encourage companies to increase capital investment

Looking to the future

The decision not to penalise entrepreneurs through changes to CGT reliefs is welcome although it may well only be a stay of execution. We cannot assume that the Chancellor will ignore the recommendations from the OTS report. Rishi may revisit the reforms as part of the Autumn Statement and at a time when the economy may be in better health.

The UK economy is far from out the woods and the Chancellor acknowledged there will be difficult months ahead.

It is by no means certain that CGT tax rates are going to remain at the current levels indefinitely and so there remains some concern amongst business owners that they may be made less attractive in future budgets.

Therefore, for any business owner considering a sale, and bearing in mind potential autumn reforms, the next six months could be an excellent time to explore a sale process.

Disclaimer

The information was correct at time of publishing but may now be out of date.

Corporate Finance
Posted by James Kennedy
12th March, 2021
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