After a painful year for society and the economy, we all hold out hope that the successful vaccine rollout will put the Covid-19 pandemic in the rear view mirror by the summer. Whether your business has survived or thrived throughout these (cliche warning) unprecedented times, now is the time to look ahead at what the chancellor's changes mean for the current & future sale value of your business.
So let's look at the key areas:
Capital Gains Tax & Entrepreneurs Tax Relief
The big news is... no news. No change to Entrepreneurs Tax Relief (now Business Asset Disposal Relief) or Capital Gains Tax rates for personal profits arising from the sale of your business, despite much speculation that these might be aligned with Income Tax rates.
As such, subject to qualifications (always seek independent tax advice), selling your shares in your privately owned business will attract 10% tax rates on the first million of gains and 20% on the remainder. We think this is likely to remain until the Autumn statement and probably until the 2022 budget.
Corporation Tax
The increase in Corporation Tax to 25% (tapered from 19% on the first £50,000 of profits up to the 25% from £250,000) comes into effect in 2023. This will put pressure on larger acquirers' investment funds and valuation criteria when assessing returns from target acquisitions.
For listed companies, their market capitalisations will be impacted as the post-tax 'earnings' in 'price:earnings ratio' will be that much lower than otherwise, as will potential post-tax dividends, which also drive valuations. And if these acquirers get less bang for their operating profits than they used to, then this will have knock on effects for what they can pay for acquisitions.
Clearly, in this regard, the further ahead of the Corporation Tax increase kicking in a business sale transaction takes place the better.
Recovery Loan Scheme
The government is continuing their commitment to back lending to businesses impacted by Covid-19 shutdowns. However, instead of the Bounce Back Loans and CBILs we have seen, the Recovery Loans will be utilised, with government guarantees of up to 80% of the value borrowed.
As with any type of debt, SME & Mid-Market Business Owners considering a sale should keep in mind that settling outstanding balances from any Covid-related loans will be factored into the equity value received by shareholders at the point of sale, in one way or another.
The "Super-Deduction"
A 130% capital allowance on "qualifying plant & machinery investments"; and a 50% first year allowance for "qualifying special rate assets". The super-deduction will allow companies to cut their tax bill by up to 25p for every £1 they invest. The ICAEW have called this a game-changing measure.
The relevance of this temporary change for your business sale, however, will very much depend on the specifics of your business and M&A valuation methodologies in your sector. This is an area you should take advice to ensure you get optimum tax and capital value advantage before embarking on a sale process.
All in all, this is a far better budget for business owners considering a sale than it could have been had rumours of CGT increases come to fruition this year. They still might in future budgets but that window of opportunity remains open for now.
Jonathan Tate
4th March 2021
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