Rumours are gathering that the Treasury are set to amend/remove/re-jig entrepreneur’s relief in the next budget. Broadly, Entrepreneur’s Relief , or “ER” can, subject to meeting a few criteria, give an effective capital gains tax rate of 10% on the disposal of shares by owner managers in a private company in the UK when they sell their company on gains (and any gains from previous similar sales) of up to £10 million. It is has been seen as a generous tax relief and is designed to encourage owners of SMEs to reinvest profits into their companies to grow them and encourage that.
Many owner managers on the cusp of a sale (or mid-process) before the last election were desperate to get deals done since they saw a potential spectre of a Corbyn-led government meaning a complete end to this valuable tax relief, so the pressure was on to get the deal concluded before the election. We all now know that this was something which was never going to happen.
Ironically, it is the spectre of a Tory majority Government removing /amending the relief that is worrying owner managers: we know that the Prime Minister has made many promises about spending and that has to be paid for from somewhere; Boris Johnson’s election manifesto promised no increases in income tax, NICs or VAT – so it doesn’t leave him with many other options in terms of creating an increased revenue from tax payers. Increasing corporation tax rates will be difficult given, with Brexit on the horizon, he will be trying to attract businesses to the UK, so capital gains tax and particularly ER may well be in the firing line. The Treasury are making no comment on suggestions that amendments to ER could be announced (and be effective) on budget day – which has been announced as 11 March.
So what does this mean for the M&A market? Undoubtedly those deals which are underway will be under pressure to complete by the end of February (assuming a March budget) – particularly from sellers. One to watch will be canny/unscrupulous (depending upon your perspective) buyers who price chip at the last minute, knowing any delay may well, net, produce a worse realisation for sellers: these are all things we have seen when changes were envisaged to the predecessors to ER, taper relief and (for those old enough to remember) retirement relief.
Any sellers who have not yet identified a buyer, or not having agreed outline terms may have to move quickly to avoid the risk of losing out tax wise from those rumoured changes.