The Budget – how it could impact the deals market

The macro view

While there were some post-Budget jitters in the bond and stock markets, the Chancellor has passed her first test and the prospect of greater stability in terms of economic and tax policy will be appreciated by business decision-makers.

We therefore expect appetite for quality businesses to be undimmed by the Budget, given that M&A is driven not by tax considerations but a quest for growth by accessing new markets, skills and technology and synergies, or for better-than-average returns in the case of private equity.

Looking at the impact of the key measures in turn….

Capital Gains Tax (CGT)

The headline rate of CGT on the sale of shares in a private company increased from 20 to 24 per cent with immediate effect. While there was speculation that even higher rates might apply, the change is still a 20 per cent increase in the headline rate and therefore not insignificant. We expect that the change will not significantly change behaviours among business owners but given the reduced proceeds that follow this rise checking out your plans with a tax and financial adviser as part of a sale process is a must.

It was possibly a surprise that business asset disposal relief (BADR) remains but, over time, the relief becomes less meaningful. To recap, BADR reduces CGT on the first £1m of gain to 10 per cent, but this rate will increase to 14 per cent from April 2025 and 18 per cent from April 2026.

For a short period therefore, the differential in rate between BADR and the headline rate of CGT is 14 per cent, and this could provide a planning opportunity for those currently in a sale process.

For businesses valued at the lower end of the scale, or for those with multiple shareholders, the changes in BADR might be a reason to accelerate sale planning, to avoid the increase in April 2025. The planned changes may also provide a rationale for dealing with minority shareholders who want to exit.

For the most part, we advise not getting distracted by the future BADR changes and to focus instead on planning a robust sale process to try and limit the impact of the additional CGT.

After years of speculation around CGT rates, we now hope these new rates will not change during the life of this parliament, so that exit planning will not be disturbed by speculation about rate increases in advance of future Budgets.

National Insurance

For future vendors looking to maintain their net proceeds in the context of the CGT rise, your task will be slightly harder given the increases in employers’ national insurance. Those currently in a sale process are likely to face questions from prospective buyers about the impact of the changes and whether forecast profits will be threatened. In other words, it could become a valuation issue.

Inheritance Tax (IHT)

Shares in qualifying private companies are currently not charged to inheritance tax. Shares in most trading companies qualify for this relief. Furthermore, on death, shares in qualifying businesses are valued and can be passed on by the estate with an uplifted base cost for CGT purposes.

In this way, families have been able to pass ownership through generations without any IHT arising, and with eventual sellers benefitting from reduced CGT liabilities.

This relief will be significantly curtailed with effect from 6 April 2026, such that shares in private companies (in excess of £1m) will be subject to an IHT charge of 20 per cent, other than where shares transfer between spouses.

For many of our clients, shares pass on death to sons and daughters who are running the family business but have limited or no ownership. So, for a company valued at £10m, such a situation would create a charge to IHT of £1.8m (assuming that nil-rate IHT bands have been used).

The government has indicated that more information on these changes will become available during early 2025, with one of the key issues being when such a tax charge would be payable.

We know already that these changes are of serious concern to clients and will require significant thought in terms of the approach to long-term ownership of businesses. We can expect that M&A may be part of these considerations. However, it is important to point out that cash from a business sale results in a 40 per cent IHT charge as opposed to the new but lower 20 per cent rate, should shares still be held on death.

Employee Ownership Trusts (EOTs)

For some time now, employee ownership trusts have become relatively mainstream alternatives to other forms of M&A.

While the Budget did not change the nil rate of CGT that applies to EOTs, legislation was introduced on Budget Day to tighten up the EOT regime to limit the scope for abuse. In particular, the valuation of EOTs must be subject to greater scrutiny by EOT trustees, with an onus on making sure that businesses are not acquired at above market value. The new legislation also will make a future sale of an EOT company more challenging.

With the headline level of CGT increasing, we expect to see EOTs being given greater consideration by business owners.

Conclusion

This Budget was preceded by more speculation than any we can remember, and our main reaction is that we now know where we are and hopefully our clients can plan ahead without having to worry about changes to the tax regime for the length of this parliament.

A well-planned and competitive sale process will help mitigate the planned CGT increase. Nevertheless, we recommend that owners considering a sale should, as always, spend time with their tax and financial adviser to fully understand what proceeds are required from a sale so that plans are created in that knowledge.

This is particularly the case in the short term, with buyers looking to understand the impact on valuations of the NI change.

The IHT changes on shares held in private companies will, in our view, be the change that lives longest in the memory and will require serious thought and potentially require changes to long-held plans.

If you have any questions or would like to explore the topics covered in the article, please don’t hesitate to call us on 0161 477 2474.