Out of M&A adversity comes opportunity

The total combined number of monthly cross-border and domestic mergers and acquisitions (M&A) involving a change in majority share ownership averaged at 119 transactions during the three months of Q1 2023, compared to over 150 each month throughout the previous year. A sluggish start to 2023 for M&A activity means that many shareholders looking to sell their companies may be forced to push back their exit plans until investor appetite recovers. This may not be entirely bad news if owners use the current lull in M&A activity to consider tax planning opportunities to maximise returns on any future sale. What are some of the opportunities available? 

The first, and most obvious, answer is maximising the value of the business. There is a wide range of share incentive planning, tax advantaged or otherwise, that can be implemented to incentivise a management team to drive growth and improve any final exit value. These incentive schemes can allow for management teams to benefit from the exit in a manner that is more tax-efficient for both them and the company as compared to the use of, say, pre-sale bonuses.  

Improving the corporate structure can make the business more attractive to potential buyers, ensuring a smoother sale process. This can include separating any non-core business activities from the trade, simplifying the structure, and extracting or ring-fencing specific assets. Any restructuring is likely to have tax consequences which should be considered.  

Minimising tax leakage can also ensure shareholders maximise the net returns they receive on sale. Business Asset Disposal Relief (BADR) applies a 10% rate of capital gains tax to the first £1m of qualifying gains received by an individual in their lifetime. The rules are not as straightforward as they may first appear. Amongst the qualifying conditions for BADR is a 2-year holding period for the shares. Where timescales allow, shareholders could potentially gift shares to other family members that are officers or employees in the business to make use of multiple BADR limits.

Large value business disposals often create an immediate inheritance tax issue. However, shares held in unquoted trading companies can potentially benefit from 100% inheritance tax relief, meaning substantial value can be tax efficiently transferred to children and future generations (the beneficiaries) by gifting shares into a trust. On a future sale, proceeds will have effectively been transferred away from the owner to the trust for benefit of the children and grandchildren, reducing the transferor’s personal exposure to inheritance tax on the value gifted. The trust will have its own tax implications to consider but such a structure can help to ensure greater wealth is retained within the family.

Family investment companies (FICs) are companies structured with a family ownership structure, used to hold and pass on family wealth and investment assets. Holding trading company shares in such a structure can potentially allow for some funds to remain within a company structure and be reinvested following a sale of the trade. Depending on the ownership structure, a FIC can also offer ongoing inheritance tax and wider tax planning opportunities. 

With many pre-exit planning opportunities available, only some of which have been covered here, business owners should take advantage of any potential delays in their exit plans to consider options for maximising returns on a future sale.