Introduction
Now there has been a formal change in government, potential tax changes could be on the horizon! But what does this mean for the Acquisitions Market? Should you be concerned? CEO of IFA Acquisitions, Gary Venner, and Partner of Herrington Carmichael, Alex Canham, discuss this topic in our second weekly Acquisition Q & A series.
Potential Tax Changes – Business Asset Disposal and Capital Gains Tax
Gary began: “The various tax changes that we’ve heard Labour might affect, include pensions i.e. whether they’ll have a single rate, etcetera, I don’t think this will really affect the Acquisitions Market but the one I think we have lack of clarity on would be Business Asset Disposal Relief (BADR). Will it stay? Also, Capital Gains Tax. We’ve not heard anybody deny that they’re not going to change that tax and whether capital gains will be more aligned to marginal tax rates of income tax. For anybody trying to sell a business, the big attraction was the 10% BADR up to £1 million. This was reduced from £10 million when it used to be known as entrepreneur’s relief to £1 million in the March 2020 budget. But that first million pounds per individual is very welcome to anyone selling their business. You’ve got to meet certain criteria and of course, what doesn’t fall into the Business Asset Disposal Relief or exceeds £1m is likely to be treated as Capital Gains Tax at 20%. Again, a very attractive rate, compared to higher rate at 40% and additional rate tax at 45%. It’s the best way to get capital out of the business and when people are looking to sell, they are looking at that net amount after tax so, I think there is a concern there as to if and when will there be a change in those rates.”
Will there be a snap budget?
“Possibly not. Liz Truss, did one so quickly after she got into office and the Labour party has said basically that they wouldn’t do that. That they want to make sure that they have the OBR report on side and so they would need to give a 10 week notice.”
“There is a window now between everything staying the same and when any changes announced in the budget, when those changes come into force.”
“I think we’re going to see a lot more acquisition activity in the business. If I was at retirement age and I was thinking I am wanting to look at selling my business over the next 12 to 24 months and I like those [BADR and CGT] rates, I think I might be wanting to think about doing something now. Heads of Terms is usually a non-binding offer”.
It is important to understand that the date of disposal for Capital Gains tax purposes is the date contracts are exchanged (or the date that the contract becomes unconditional). It is not the date when you receive the monies (the completion date) unless the exchange of contracts and completion occur on the same day.
So, for deals that are out there at the moment, I think it may be worth just getting on with them and trying to get through that process to an exchange of contracts.
Gary continued: “It might be wise to start discussions now because we do know that the length of time it takes from beginning to end of talking about an acquisition can be up to a year. We do more deals at around 3 to 6 months, and we did one only last week which exchanged within six weeks so, we can get deals through quicker.”
“I think those are the two taxes that are likely to affect our Marketplace the most. What’s your feelings on this, Alex?”
Alex Canham then shared his thoughts: “I think you’re right in that sense. That’s certainly what we’re hearing from people as their biggest concerns. Also, rightly, is the capital gains tax because of the sums of money involved and the potential changes to rates. We hear in the press that things are going to be significant rather than just a couple of percentage points. I think the problem is corporation tax. If you’re doing an asset purchase, there is the fear of paying corporation tax if the proceeds go into the company at 25%, the highest it’s been for a long time. The Labour party does stifle growth really with businesses however with big spending plans it’s very difficult to reduce those current tax rates so, I think that is likely to stay.”
Conclusion
If you are considering an acquisition, bear in mind the impending tax changes potentially on the horizon! If you like the current rates, we recommend you don’t delay initiating the process in case you miss out.
This adapted excerpt comes from our second Acquisition Q & A series on the IFA Acquisitions YouTube channel. Don’t miss out! Head over to our channel to watch the series and gain key information to support you in your acquisition journey.
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