Autumn Budget 2024 in review – What will be the impact on M&A activity?
As part of a series of articles analysing the governments Autumn Budget, Kerry Southworth, associate in our corporate team, looks at the key budget measures that may impact on M&A transactions, and the implications for vendors and acquirers.
The anticipation of sweeping changes to the tax system in Labour’s first budget in almost 15 years, meant that the summer and early autumn months of 2024 saw a surge of M&A activity, with many business owners keen to get their deals completed prior to 30 October 2024.
So was the rush justified, and how will the tax changes announced by chancellor Rachel Reeves affect deal volumes for the remainder of 2024 and into 2025?
Changes to capital gains tax in the budget
As a general rule, capital gains tax (CGT) is paid by individuals on the realisation of an asset that has increased in value, except for personal vehicles and their main home.
For owner managed businesses, this will likely cover their shares (if the business is an incorporated entity) or the business assets (if the business is not incorporated).
The chancellor, as predicted, did increase the CGT rates to match up with residential property rates. As from midnight on 30 October 2024, the lower rate of CGT increased to 18% and the higher rate rose to 24%.
While not as large an increase as some were predicting, this is likely to cause some business owners, especially those on the lower rate to think twice about how and even whether, to sell their business.
Business asset disposal relief
The increase to CGT is a precursor to the increase in the Business Asset Disposal Relief (BADR) rate, which will remain at 10% until 5 April 2025. For financial year 2025/26, the BADR rate will be 14%, after which it will then rise to 18%. The limit of £1m for BADR will remain unchanged.
We expect that there will be a push to complete M&A deals in the build up to these changes, so that business owners can receive more favourable tax rates.
From 30 October 2024, the first change to BADR comes into force in just over five months. With this deadline in mind, we would encourage any business owners who are looking to sell to get in touch with legal and financial advisors as soon as possible.
Inheritance tax and changes to property reliefs
In addition to the changes to CGT and BADR, there were significant new rules for inheritance tax, including changes to business property relief (BPR) and agricultural property relief (APR), which will have a major impact on business owners and particular for family business succession.
Our private client team has explored what these changes mean in more detail, but in summary they included:
- Bringing unused pension funds and death benefits within the scope of inheritance tax from 6 April 2027.
- Changing BPR and APR by capping the value at which 100% relief is given on combined assets at £1m. Above this threshold only 50% relief will apply, making the rate of inheritance tax 20%.
- Reducing the rate of BPR relief for shares held in companies on the Alternative Investment Market (AIM).
These changes will be phased in over the next few years. The Chancellor announced that there will be consultations in early 2025 for implementation, and it is important to see what the reforms will look like before making any rash actions.
Employee Ownership Trusts
With added tightening of the rules for Employee Ownership Trusts (EOTs) announced at the same time as the budget, some are speculating that the Chancellor is encouraging business owners to consider EOTs as a way to cut through the tax rises.
The changes for EOTs include:
- The consideration for company shares bought by the EOT must not exceed market value – trustees of the EOTs are given a new requirement to ensure this is the case.
- Much needed confirmation that the company funding the EOT consideration will not be treated for tax purposes as a distribution.
- Restrictions on who can be a trustee of the EOT – this must be a UK tax resident.
- Additional restrictions on selling shareholders, or their connected persons, retaining control of the company post sale.
Some of these changes do not apply for EOT transactions which were before 30 October 2024.
What does this mean if you’re selling or buying a business?
We anticipate there will be an increase in M&A activity, although not as high as that seen in October 2024, in March 2025 prior to the increase in the BADR rate.
On the whole, we expect to see earlier succession planning by business owners and predict an increase in trusts for share ownership, as well as family investment companies.
Our corporate team is well-placed to provide advice and assistance to business owners during this time.
For more information, contact Kerry Southworth or contact us using the form on our contact us page.