Surge in M&A activity amid Capital Gains Tax uncertainty

The tax regime for owners selling a business in the UK is currently favourable, but for how much longer?

Ritchie Whyte, Partner and Head of Corporate & Business Advisory services at Aberdein Considine, looks back on a busy quarter for mergers and acquisition activity, and forward to what could be a changing landscape.

There is continuing speculation that Chancellor Rishi Sunak will announce an increase in Capital Gains Tax in his Budget on March 3 to help to recoup the significant costs arising as a result of the pandemic.

If there is a hike in CGT, it may likely become effective on Budget day or alternatively from the start of the new tax year on April 6.

Either way, it is generally accepted that there is not much time left to complete a deal under current CGT rates – there already having been a stay of execution at the November 2020 Budget.

This has led to an increased sense of urgency among entrepreneurs to get deals done before the budget and is one key driver behind what has been a very busy start to the year in the SME M&A market.

Aberdein Considine’s Corporate Team has seen an uptick in activity amongst our clients from the end of Q2 last year as clients look to achieve certainty in terms of locking in current tax rates.

To give a flavour of what might be on the way in the Budget, a report on CGT reform by the Office of Tax Simplification published last November recommended closer alignment of Income Tax and CGT rates.

If the Chancellor equalises these taxes, it would push the top rate of CGT to 45% - completely changing the financial picture for those selling a business.  Business Asset Disposal Relief (formerly Entrepreneurs Relief) which reduces CGT to 10% may also be revisited in terms of the qualifying criteria, rate and/or lifetime allowance of £1m – already reduced from £10m las year.

Last year was one like no other for Scottish businesses, as the business community and M&A market had to navigate new challenges due to Covid-19 and Brexit.

However, throughout all the disruption, there remains one constant - investors and business owners still consider M&A as a key part of their strategic plans for growth, expansion and value realisation. 

Many businesses have proved their resilience and ability to be “nimble” in order to deal with rapidly changing market conditions and it is clear that acquirers and investors – for the right opportunities - are prepared to take a long-term view.

A well-planned and executed acquisition can provide access to new market sectors, diversification of service lines and capabilities as well as the gaining of intellectual property and increased geographical reach.  

These opportunities could be developed organically, but that must be weighed against the time, risk and resource required to build from scratch - especially given today's pace of market change, and the unique opportunities that exist following such an unprecedented year.

The tax regime of recent years has helped to encourage and reward innovation, enterprise and risk-taking - recognising that it creates value for the wider economy – and this in turn has facilitated strong activity in the SME M&A market.  It is hoped that the expected changes do not significantly alter this landscape and disincentivise the entrepreneurs of tomorrow.  All eyes will be on the chancellor come 3rd March.