M&A Market what has changed?

Following the Autumn Statement last year, John has been speaking to David Evans from Sedulo about what the changes mean to the M&A market.

Transcript

0:00:00:00 - 00:00:25:07
Unknown
The Deal Lawyer podcast with John Andrews, powered by JMW Solicitors. So I’d leave it to the audience to make their own mind up as to whether or not they think a £60,000 tax saving offsets the risk that entrepreneurs take setting up snd managing their own businesses and running them for a number of years. Lots of our clients think that's not a fairreflection.

00:00:25:07 - 00:00:43:12
Unknown
So.

00:00:43:14 - 00:01:12:20
Unknown
Hello and welcome to the latest edition of The Deal Lawyer podcast. I'm John Andrews and today I'm joined by David Evans. David, that's a little bit about yourself, the way from what you doing. Hi, John. Good to be back. Yes, I'm unemployed with evidence from two July accountants. And my of expertise is is all things taxation and the CID Yellow is a national firm of accountants with offices in the major cities and in the UK.

00:01:12:20 - 00:01:43:18
Unknown
So looking forward to the job. Yeah, brilliant. And obviously it's your second time on the podcast. The last time we spoke was just before the the last Rachel Reeves budget, and I think it's what would happen to capital gains tax rates. You just give us a quick reminder of what actually happened in the end. Yep. So lot speculation in the run up to the to the to the autumn budget as we saw this last time, lots of people worried about what's going to happen to capital gains tax.

00:01:43:19 - 00:02:02:22
Unknown
Lots and lots of speculation in the press about that. So so what did we see What what what happened? Quite a few things, actually. So it's quite. And the measures kind of kick in at various different dates as well. This is a bit tricky to get your head around. So budget took place on the 30th of October. Okay.

00:02:02:23 - 00:02:29:18
Unknown
So prior to to the budget, the rates were and I think this is important, just the sentencing. So the of the main rate of capital gains tax for most assets was 20%, unless you were a basic rate taxpayer, in which case you could benefit from a 10% rate. And there was a separate rate for residential property, which was 24%.

00:02:29:20 - 00:03:15:03
Unknown
Clients qualifying for business asset disposal relief, formerly known as entrepreneurs Relief, which I still can't talk about our listeners to this, this podcast I guess we'll be interested in was 10% and that was capped at the first million pound of capital gains or 10% on the first million. Yeah, and carried interest was 28%. Okay. So a whole plethora of different rates with immediate effect from the 30th of October onwards, the main rate of capital gains tax jumped from 20% to 24% and the the rate that was available for basic rates, taxpayers jumped from 10 to 18%, effectively bringing it in line with the rates that apply to residential property.

00:03:15:03 - 00:03:39:03
Unknown
So there isn't now any differential between whether whether or not you're disposing of residential property or stocks and shares any asset whatsoever you're looking at those mean reason, I guess, was lower than what people feared. And there was a lot of speculation, pre-budget that the rates were going to be aligned with income tax rates, maximum income tax rate being 45%.

00:03:39:03 - 00:04:08:11
Unknown
So you could say 24% against 45% isn't too, but business asset disposal relief. So there were some changes announced to that, but they don't come into effect until the 6th of April 25. So this year. So in a in a few weeks time, it's not 10% rate on the first million. It's going to be increased to 14% and then in a year's time.

00:04:08:11 - 00:04:40:13
Unknown
So from 6th of April 26, the 14% becomes 18%. So again, on the first £1 million of capital gain. So. So the million pound threshold has not changed, but the rate applied to it has. So as we stand today in February, if clients can complete a transaction prior to the 6th of April, they'd be looking at 10% rather than 14%, meaning someone is maximizing that billion pounds.

00:04:40:13 - 00:05:13:22
Unknown
Allowance is a £40,000 saving. So there's a big incentive at the moment to try and get deals done and completed pre April. And then interestingly, once the rate increases to 18% next year, what we're effectively saying is the value of business asset disposal relief to somebody is £60,000. That's quite interesting, I think, because it wasn't that long ago when the rate was ten, 10% on the first £10 million of capital gain.

00:05:13:24 - 00:05:39:03
Unknown
So it's a substantial reduction really in the last five or six years, something like that. So I'd leave it to the audience to make their own mind up as to whether or not they think a £60,000 tax even offsets the risk that entrepreneurs take in terms of SAT and managing their own businesses and running them. Remember of yes, lots of our clients think that's not a fair reflection.

00:05:39:03 - 00:06:13:11
Unknown
So I suppose those are the main changes carried interest that they will come onto later on. So I'll save myself. A Not for now. In terms of capital gains tax, those are the main ones, I'm sorry to say, just to summarize. No differential any more from from from residential property to finance and business has exposed relief change in and from April this year and again from April next year really in recent weeks, some of the focus has been upon what impacts the sort of national insurance changes have had on employers and on businesses.

00:06:13:17 - 00:06:37:20
Unknown
But in terms of the changes to CGT rates, what impact have you seen seen them have on businesses so far? I mean, we had a little bit of a rush here after the also statements got some deals done fairly swiftly. So anticipation we can have another look at the tax savings, not so significant as to justify that kind of action.

00:06:37:20 - 00:07:11:00
Unknown
Really. Yeah. So you're right, We did see a fairly substantial increase in people trying to get deals done. pre-Budget obviously, with the fear that the rate might move over to the income tax rates, as we discussed. So we are also very busy in the run up to the budget again. Well, naturally that slowed down a little bit in the weeks that immediately followed, and we're still seeing people trying to get transactions over the line pre April before the business after disposal relief changes are.

00:07:11:02 - 00:07:33:01
Unknown
I guess thereafter there won't be quite as much as an incentive for people to try and get deals over the line. Of course, you know, 60,000 is is not an insignificant sum of money, don't get me wrong, But I think things will return to a degree of normality sort of beyond April, applying start to think about what they actually want to do.

00:07:33:03 - 00:08:00:04
Unknown
People might end up in holding on their businesses, I suppose, instead of sort of offloading them, you know, the amount of proceeds that somebody is prepared to accept may of course change given that the taxation is changing. So, you know, I think that's all still to play out, to be honest. All we're seeing at the moment really is people still trying to finish lots of deals obviously were held up or didn't finish pre pre the budget and they're all trying to get over the line.

00:08:00:04 - 00:08:32:04
Unknown
Still starts to see I suppose that's what we're seeing anyway in amongst our clients. Yeah. I mean I think you know from the pre-budget rush you always have the quiet period before Christmas and actually we've had a fairly, fairly quiet start to January really, I think we're starting to pick up a bit. We we've had a number of calls from clients looking at looking to start their deals, but it doesn't seem such a driver to be getting them down by April.

00:08:32:04 - 00:09:00:04
Unknown
So I think you're right. I think that given the changes that are now, I think people will be a little bit more measured about their deals and perhaps concentrate more on the price they're getting than the actual tax side that may or may not be available. You mentioned a bit earlier about about carried interest. Can you just give us a bit of an explanation as to as to what that is and what impact do you think that may have on private equity?

00:09:00:06 - 00:09:36:10
Unknown
Yeah, of course. So it's quite a sort of tax technical concept, but it could have a knock on impact, I suppose, in terms of the private equity market and therefore what business owners could expect to receive in terms of their transactions that they're trying to get through. So carried interest basically is a form of performance related reward that fund managers get to think about private equity funds.

00:09:36:12 - 00:10:09:21
Unknown
Hopefully they've got full managers that are sort of managing their investments and way they get remunerated. It isn't necessarily through a traditional salary. They get a cut to a percentage of the profits that the fund makes. Now traditionally and not percentages is referred to as carried interest, and traditionally not carried interest has been subject to capital gains tax rather than income tax free budget, and it did have a separate rate of capital gains tax of 28%.

00:10:10:02 - 00:10:45:09
Unknown
However, from April this year that 28% is becoming true to 2% and from April next year. So in a year's time, 2026, the proposal is to effectively stop it being subject to capital gains tax and instead make it subject to income tax. The government's view really is that in principle it's a reward for the provision of investment management services and therefore should isn't really any difference to employment income for these fund managers.

00:10:45:09 - 00:11:08:06
Unknown
And therefore the capital gains treatment was and has been somewhat of a concession. I understand the the fund managers themselves, the private equity market would almost certainly disagree with that because of the level of risk involved. You know, there's no guarantee that the performance of the fund is going to improve over time. What does this mean in practice?

00:11:08:06 - 00:11:32:11
Unknown
Well, think about it. From April next year onwards, when it becomes subject to income tax, you then you're looking at maximum tax rates of 45% versus 28% as it is today, plus National Insurance on top. Of course, if we're saying it is employment income, a knock on effect is, of course, fund managers will pay significantly more in tax and they've been used to in previous years.

00:11:32:13 - 00:12:02:14
Unknown
Well, what does this mean? Could we see an impact on how the firms themselves operate their investment strategies? Perhaps could it reduce their appetite for high risk stuff? Could we see fund managers trying to engineer situations as a realization of gains and rise to the rule changes to try to lock in that CGT rate so we could start to see it drive how the funds actually operate?

00:12:02:16 - 00:12:48:02
Unknown
Will the funds simply pass on additional cost to to the users to compensate the fund managers? Will we see fund managers leave the UK? That would be a pretty disastrous thing. I think traditionally the UK has been very competitive internationally in terms of investment firms. Could we see the UK become less attractive to high flying international fund managers out of this then translate into the to the prices that private equity firms offer to manage businesses, as it were looking to do a transaction for the first time, although it's quite a technical piece, I think in practice we could see quite widespread knock on effects in terms of the whole private equity market because fundamentally it

00:12:48:02 - 00:13:09:16
Unknown
is increasing the cost of the private equity market doing their business. And so how will that impact in the same way that the National Insurance rises impact on business? And will we see that passed on to customers or or will businesses also for that cost? It's the same principle, really. Wow. There's there's a lot to take in there, actually, David, if you think through the implications.

00:13:09:16 - 00:13:29:21
Unknown
Well, that's what leads you to answers is will fund managers needs driven more by the self interest than what's actually going to be in the best interest of the of the business they've actually invested in and and are looking for it. Yeah. Yeah. So when you take a step back and think about it, this is not a good.

00:13:29:23 - 00:13:53:05
Unknown
Yeah, absolutely. I think this all comes back to this this whole issue that I keep reading about at the moment in the press about how many, how many millionaires each that will be as each family in the UK. Of course, we're probably going to be a few fund managers and they're ready if you start to say an excess of demand and their funds going abroad, you start to wonder where the UK's going to go.

00:13:53:07 - 00:14:20:21
Unknown
So looking in that six months going forwards, which the markets is going to go with, I think it's going to be a really, really interesting period from from our perspective as professional advisors. I think there's a lot of a lot of changes happening at the moment that impact businesses. Of course, you know, if you pay it right back, just take the National Insurance National Living Wage changes that are coming into play in April.

00:14:20:23 - 00:14:52:23
Unknown
Fundamentally, unless businesses can pass those costs onto their customers, that is going to impact things like that door of the business, which in turn then impacts the multiples that the businesses can achieve. And so all of a sudden, you know, if you just if you were just reporting the same performance as you did last year, but with these extra costs and is that going to lead to a decrease in business valuations and that or does that mean that business owners are going to be more hesitant or more demanding in terms of selling their businesses?

00:14:52:23 - 00:15:16:03
Unknown
Who knows? Obviously, the carried interest that we talked about, similar kind of principle, but from the fund managers perspective, from private equity's perspective, there's a lot to talk about and a lot of press coverage about the inheritance tax changes with things like agricultural property relief and business property relief. So, you know, the more longer term planning that clients have done historically is now being called into into question.

00:15:16:03 - 00:15:43:19
Unknown
So I think from a business owners perspective, I think there's a lot of changes that are afoot to fundamentally change the sort of medium to longer term strategy of business owners and how that impacts the M&A market. I guess, I mean, listen, I suspect there's always going to be a demand for fund managers and the private equity to buy growing businesses, don't get me wrong, But personally, I think we might see a narrowing of that.

00:15:43:21 - 00:16:04:23
Unknown
Maybe fund managers get a bit more pick and choosy in terms of what they what they're looking for. We might see fees increase, we might see proceeds for the business owners decreases as a result. So yeah, I think I think it's going to be it's just an interesting period, a period of real change in that sector. Yeah, but as I say, I think it's this has been a fascinating discussion for me actually.

00:16:04:23 - 00:16:23:06
Unknown
I if I, if I'm being honest, I've forgotten about many of the changes that have been implemented. I'll probably put them out my brain thinking, well, it's not quite as bad as it was going to be, but when you sum them all up and put them together, you just see an increase in tax burden on SMEs, in particular small business owners.

00:16:23:06 - 00:16:58:02
Unknown
And I think there are, you know, it's a tricky time and an interesting time for us. So what would that be? This that's been a really, really excellent summary of where we got to in the Autumn Statement. And let's watch this space and maybe it will speak you to six months time. Just say how well we have got the we have now got spring statements look forward to on the 26th of March, which I always at least the Chancellor did say last year that they would move to one fiscal event, a year that announces tax changes, where we see tax changes in March.

00:16:58:04 - 00:17:21:13
Unknown
He knows my but my money's on. Yes, we will. So we'll have to wait. Yeah, exactly. I can't see it sticking to that. David, thanks very much for joining us today to follow up with you on any of the issues discussed. How it's best to contact you. Email probably is the best one or LinkedIn so or you go viral website and dates are actually looking at UK.

00:17:21:15 - 00:17:48:06
Unknown
David Dot Evans up to you looking at UK or looking upon links and thanks very much for listening to the deal or our podcast if you'd like to contact me to discuss this or any other issues Risen or matters discussed in previous podcasts. My email address is John Dot Andrews, J.M.W. dot Code dot UK or my mobile is low 7768266036 speech.

00:17:48:06 - 00:18:05:01
Unknown
You say.