In the United Kingdom, recent adjustments announced in the Capital Gains Tax (CGT) will play a crucial role in structuring and negotiating mergers and acquisitions, impacting both the buyer’s and seller’s final returns. To shed light on how recent CGT adjustments will shape M&A transactions, we’ve gathered insights from Andy Haigh, Partner at our Translink Corporate Finance office in the UK. His insights provide invaluable guidance on navigating CGT’s complexities, from choosing between share and asset sales to leveraging key reliefs such as Business Asset Disposal Relief (BADR) and the Substantial Shareholding Exemption (SSE) is essential for maximising after-tax proceeds.
This conversation explores key aspects of CGT in M&A transactions, how we help our clients to navigate tax liabilities, plan strategically, and make informed decisions in the deal-making process.
- What are the main changes to the UK tax regime arising from the 2024 budget which are relevant in an M&A context?
The main direct changes arising from the budget in terms of Capital Gains Tax are:
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- Capital Gains Tax Rate Increases: The main CGT rates applicable to equity share disposals have been increased from 10% and 20% to 18% and 24%, respectively, for disposals made on or after 30 October 2024.
- Business Asset Disposal Relief and Investors’ Relief: The CGT rate for BADR and Investors’ Relief is set to increase to 14% for disposals made on or after 6 April 2025, and further to 18% for disposals on or after 6 April 2026.
Indirectly, the following changes will have an impact on the appraisal and valuation of companies in an M&A context:
- Increase in Employer NIC Rate: The rate for employer NICs will rise by 1.2 percentage points, moving from 13.8% to 15%.
- Lowering of the Secondary Threshold: The earnings threshold at which employers begin paying NICs will decrease from £9,100 to £5,000.
- Corporate Tax Roadmap: The UK government published a Corporate Tax Roadmap outlining plans for corporation tax and related taxes over the parliamentary term. This initiative aims to provide businesses with a stable and predictable tax environment to encourage investment and growth.
- In your opinion, how are the changes to the capital gains tax regime likely to impact M&A activity in the UK?
The media narrative in advance of the budget was varied but typically predicted much more onerous changes to the CGT regime in the UK. This did not end up being the case and I suspect that most shareholders in privately-owned companies let out a small sigh of relief.
Most of the clients we work with have gains upon sale of their company that are subject to the headline rate of CGT which increased from 20% to 24%. BADR is one of the reliefs available and has provided a lower rate of CGT up to a lifetime limit of £1m. So, whilst important to shareholders of companies of smaller size it is less important to mid-size company owners.
While the CGT changes will result in a tax charge that is 20% higher for sellers post the budget, in reality, the move in CGT rate from 20% to 24% is unlikely to change the majority of people’s behaviours regarding their decision to sell. Tax is one of the criteria that determines this, but certainly not usually the primary consideration.
Sellers who are laser-focused on their sale proceeds on a net (i.e. after-tax) basis might aim for a higher price to compensate for the increased tax take. However in most cases, I would say that this likely involves them deferring the sale slightly so that their company can grow into the metrics that would support a valuation allowing them to achieve their desired outcome.
From a buyer’s perspective when looking at the UK market, I would not not think the change in the CGT regime makes a great deal of difference. Sellers might ask them to uplift the price to compensate them, but I expect in the majority of cases this would not be looked on favourably by buyers.
- You mentioned some other changes in the UK tax regime which would have an impact on M&A. Can you explain?
The changes to the NIC regime are likely to have a bigger impact on the appraisal of a company from a valuation perspective. This is because it directly affects the profitability of a company.
Estimates as to the cost per employee will vary across sectors, however a rough estimate that I have seen quoted in the media a number of times is an uplift in NIC’s of circa £1,000 per employee. Hence, from 5 April 2025 a company employing 80 people, with all other things being equal, would suffer a downward movement in profit of £80,000 per annum, potentially having a material impact on its valuation.
This calculation is fairly straight forward and formulaic, from the perspective of a potential suitor of a UK company. However the overall level of thinking is likely to be more complex. What we do not yet know is the impact of this change to NICs on the wider business environment. Some companies may choose to carry the full burden of these extra costs, but others may be unable or unwilling to do so and may try to mitigate them by passing the extra costs on through price increases. How this impacts the various rungs in the value chain in any given industry will take some time to feed through into the data.
- In light of the above, how do you see the outlook for M&A in the UK market going into 2025?
I think the overall outlook for the UK M&A market is favourable – moving from cautiously optimistic towards optimistic!
The fiscal changes discussed above may lead to some increased consideration by buyers and sellers in the short term, but overall, what the new government have sought to do is get all the bad news out of the way and provide an environment of longer-term thinking from both a policy and tax perspective which will underpin their growth agenda for the next five (or ten if you believe them) years. Certainty helps build confidence and M&A is a confidence-driven business.
A more stable economic and political situation in the UK will help the country become a more attractive place to invest and do business. The interest rate momentum is also now downward which helps with cost and availability of funding, further supporting M&A activity.
Anecdotally, I believe the overall sentiment among dealmakers remains for the UK M&A market to gather momentum during 2025.
TRANSLINK INTERNATIONAL AG
