Autumn budget impact on M&A

On 30 October 2024, the new Labour Government announced its budget, introducing changes that will have a significant impact on businesses and their owners.

These include amendments to the rates of Capital Gains Tax (CGT), including Business Asset Disposal Relief (BADR). The changes are likely to influence succession planning with heightened implications for mergers and acquisitions (M&A) and Employee Ownership Trusts (EOTs).

Below is an overview of some of the budget’s critical elements that business owners should consider, especially if planning a business sale in the near future.

Capital Gains Tax (CGT) increases and impact on business sales

One of the most prominent changes in this budget is the increase in CGT rates on share sales.

The lower rate of CGT has risen from 10% to 18% and the higher rate from 20% to 24%. Additionally, Business Asset Disposal relief (BADR), which represents a lifetime allowance of £1 million, will rise from 10% to 14% with effect from 6 April 2025 and from 14% to 18% with effect from 6 April 2026.

As a result of this, some business owners planning to sell over the next year or so may consider expediting their transactions to benefit from the current lower rate.

For example, a company held by three equal shareholders (with unused BADR allowances) and a proposed value of £3,000,000 will pay an aggregate of £300,000 prior to next April, £420,000 between April 2025 and April 2026 and £540,000 after April 2026.

By completing the sale before 6 April 2025 rate increase, these shareholders could, collectively, save up to £240,000 in CGT compared with a sale just over a year later.

Selling to an Employee Ownership Trust (EOT): A CGT-free alternative

The budget has also reinforced some of the appeal of selling to an EOT as an effective succession planning strategy.

Under current UK legislation, selling a trading company (or the principal company within a trading group) to an EOT can, subject to meeting certain criteria, qualify for a zero percent CGT charge, making it an attractive alternative to traditional M&A routes, particularly given the rise in CGT rates.

While EOTs can be an effective means of ensuring legacy and employee participation, they may not suit every business.

There are comprises to be made, including deferred payment of purchase price (typically payable over 5 – 7 years) and the sellers must, subject to certain protections, cede control before receiving the full balance.

However, for companies looking to retain a strong employee-led culture and willing to make some trade-offs, there are significant benefits beyond the tax savings, typically including a more dedicated and democratised workforce and the enshrinement of business continuity.

Other upcoming measures affecting EOTs

The Labour Government has also introduced a number of other new measures affecting EOTs, as follows:

• Selling shareholders and ‘connected’ persons cannot continue to exercise control over the company or group, post-sale, via their control of the EOT. This is a welcome change and within the spirit of the legislation.
• The trustees of EOTs will be required to be UK resident at the time of the sale, prohibiting the somewhat aggressive use of offshore corporate trustees.
• EOT trustees must take reasonable steps to ensure that the purchase price paid to sellers represents no more than the market value of the company or group. Furthermore, if interest is payable on deferred consideration, it should not exceed a reasonable commercial rate.
• If a disqualifying event occurs, the period of time during which HMRC may withdraw the CGT relief available to selling shareholders following the tax year in which the sale takes place will be extended from one year to four years.
• Additional information will need to be provided to HMRC when selling shareholders claim the relief. This will include detail on the number of employees of the company or group that they have sold to the EOT and purchase price payable.

Implications for M&A and succession planning

For businesses contemplating a sale, the 2024 budget’s CGT and BADR changes (and the attention given to EOT regulation) again underscores the importance of early succession planning and the need for strategic timing.

In light of these changes, many business owners will be considering the following:

1. Accelerated sale timeline: For business owners looking to sell, completing a transaction before April 2025 / 2026 may be financially advantageous. Some (particularly owners of SMEs) will expedite deals to benefit from the current lower CGT rates applicable to BADR.
2. Consideration of EOT structures: For those prioritising legacy, culture and tax efficiency, EOTs now provide an even more compelling alternative due to the unchanged CGT-free advantage. However, the suitability of an EOT depends on the business’s long-term goals and structure.
3. Professional guidance is essential: Given the nuanced nature of these tax changes, seeking professional advisory support is essential. Comprehensive advice covering legal, tax, and valuation aspects ensures businesses select the most beneficial succession pathway.

How can Morr & Co help?

Morr & Co is well-positioned to guide clients through these complex transitions, offering extensive expertise in M&A and related legal services. We also have an experienced EOT advisory team and have advised on EOT deals with a combined value of over £150 million.

The team of advisors we work with spans end-to-end EOT services, including legal structuring, business valuation, tax advisory and management change consultancy, ensuring that businesses transition smoothly into employee ownership.

If you are considering buying or selling your business and would like to discuss any of the points raised above, please contact our Corporate and Commercial team on 01737 854500 or by email info@morrlaw.com and a member of the team will be happy to help.

Disclaimer
Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.