CGT rise fears push mergers and acquisitions

As we approached the UK Budget announcement in March rumoured changes to Capital Gains Tax (CGT) topped the agenda for business owners and entrepreneurs across the country who may have been considering the sale of their company.

Laura Falls, Legal Director at Addleshaw Goddard

In anticipation that the Chancellor was going to raise CGT rates to be more in line with income tax, which currently stand at 20%, 40% and 45% for basic, higher and additional rate taxpayers respectively, Addleshaw Goddard concluded a significant number of M&A deals ahead of this deadline.

That said, a collective sigh of relief was perhaps felt when CGT remained untouched for the time being, affording business owners a little more flexibility when preparing for the sale of their business. However, we can’t expect to enjoy these rates long-term. CGT is highly likely to come under scrutiny in the not-too-distant future as the UK tries to foot the bill for the significant economic fallout of the ongoing pandemic and is likely to be one of the taxes that is included in the consultations to be announced on 23 March.

As we move in to Q3, and the CGT rates are set for the short to medium term at least, we expect to see a notable increase in the number of entrepreneurs and family-owned businesses preparing to sell their enterprises over the summer, ahead of any likely future CGT increases in the next budget.

In a bid to strengthen balance sheets by selling non-core assets, now is a timely opportunity for many companies to sell with investment opportunities plentiful. Whilst ongoing economic uncertainty may have caused some business owners to sit tight, we are in fact seeing a healthy level of investment appetite, particularly from private equity houses which are in a strong position to invest and are primed for new opportunities.

Creating the perfect environment for an increased level of M&A activity, there is also backing available from nimble investors who recognise the opportunities available in the UK as we hope to move out of lockdown over the coming weeks ahead. More generally, chief executives and financial directors have increased levels of optimism as we are given indicative dates for the re-opening of key industries, including hospitality and tourism, helping drive investment from overseas.

M&A activity in sectors including financial services, wealth management and life sciences is particularly high, with the tech sector dominating the transaction pipeline as digital innovation continues to accelerate. Additionally, more and more firms are looking to diversify their core product and services in response to this as businesses rethink their strategies and look to acquire new technologies.

That said, M&A activity is underpinned by confidence from within the market. The current stable CGT regime, investor appetite and funding in the PE sector gives us great belief that we’ll continue to see a healthy level of M&A activity in the year ahead. However, we know how quickly the environment can change and for business owners and entrepreneurs to take advantage of current seller opportunities, then they need to act now.

Laura Falls, Legal Director at Addleshaw Goddard