How is the tax landscape impacting deal making?

30 January 2025

In today’s fast-evolving economic environment, understanding tax changes and their impacts is essential for businesses and investors. In our article, we delve into several tax developments from the Autumn Budget on 30 October 2024, which have recently influenced deal activity and will continue to do so throughout 2025 and beyond.

National Insurance contributions

Effective from 6 April 2025, the employer National Insurance contributions (NICs) rate will rise from 13.8% to 15%. This increase represents a significant shift, especially for businesses with a large workforce. Higher NICs will impact EBITDA and are likely to lead to lower business valuations. Businesses are considering how to mitigate this – for example managing costs (eg reducing the size of the workforce), passing the cost onto customers, refocusing on productivity and investing in technology, and diversifying revenue streams.

Capital Gains Tax

Deals in process were rushed to completion ahead of the Autumn Budget due to fears of significant Capital Gains Tax (CGT) rate hikes. However, the actual increase from 20% to 24% was smaller than expected and does not appear to have deterred sellers thus far.

It is worth noting that with limited fiscal flexibility, future economic downturns could prompt additional tax increases, so a cautious business owner (and perhaps those nearing retirement) may be looking to transact sooner rather than later.

The announced increases to the Business Asset Disposal Relief (BADR) rate from 10% to 14% from 6 April 2025 and to 18% from 6 April 2026 could drive increased transaction activity in the run-up to these dates, although the value impact of each rate rise to an individual seller is at most £40,000, given the £1m lifetime BADR limit.

Employee Ownership Trusts

Introduced in 2014 to encourage wider employee ownership, Employee Ownership Trusts (EOTs) offer 100% CGT relief to shareholders selling a controlling interest in shares to an EOT. The CGT rises notes above therefore make EOTs more attractive. The Autumn Budget announced a package of reforms to the taxation of EOTs to ensure they are being used as originally intended.

Additionally, changes to inheritance tax, including business relief and agricultural property relief, could influence family succession planning, potentially leading to more EOT transactions. This trend underscores the importance of strategic tax planning in deal-making, as sellers seek to maximise their financial advantages amidst evolving tax regulations.

Carried interest

The Autumn Budget unveiled long-awaited changes (after a period of consultation) to the taxation of carried interest, shifting it from capital gains (taxed at 28%) to deemed trading income with an “income reducer”, resulting in an effective tax rate of 34.1%.

The initial fear of a potential exodus of UK-based private equity managers to more tax-friendly jurisdictions like Italy or Dubai seems to have faded. The concern was that full income tax rates on carried interest could erode the UK’s position as a competitive asset management hub, leading to a loss of investment activity. However, the changes were not as severe as some were expecting, which should help to maintain the UK’s position as an attractive location for private equity investments, at least in the medium term.

For more information, please contact James Hunt, Helen Relf or Lewis Tompkins. 

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