Business Asset Disposal Relief, formerly known as Entrepreneurs’ Relief, is a tax release that the seller of a business can benefit from on sale. This incentive was set up by the UK government to encourage entrepreneurs to create new and innovative businesses and nurture them to success, then reward them for their efforts once they are ready to sell their business. The main benefit of this scheme allows a shareholder to sell their shares of a business, whole or partly, at a reduced capital gains tax rate of just 10% on the first £1m of lifetime profits made when qualifying assets are sold.
Last year, Chancellor Rishi Sunak had commissioned a review from the Office for Tax Simplification, which suggested a series of wide-reaching potential reforms, thus financial services professionals had warned of a higher rates of capital gains tax. However, the Capital Gains Tax rate has remained untouched in the recent budget at the start of the current financial year. Prior to the announcement of the new budget, many business owners and entrepreneurs alike were forced to advance their sale plans due to the pandemic or speculations regarding changes to the capital gains tax rate, even though these did not materialise. As a result, UK M&A transaction volumes and deal appetite had been much stronger in Q1 of 2021 than the prior.
This continuation of the budget anticipates a further increase in acquiror appetite as more business owners take advantage of the scheme, which essentially releases more value for a seller in the form of a lower payable tax rate on the sale of their shares. The enhancement in diversity of businesses presented to the market highlights resilience, and effortlessly allows a seller to claim the maximum value for their business from an acquiror with the capital and capabilities to carry their business forward.
Sectors such as the insurance, legal and healthcare with a focus for people and technology, has experienced a vigorous and promising level of activity with new M&A opportunities forecasted to arise in 2021. One of these opportunities comes in the form of private equity and institutional investors who possess substantial funds which they haven’t been able to deploy due to the pandemic. As these investors are yet to make those investments, shareholders can achieve higher value aspirations for their businesses.
Additionally, with the success of the vaccine rollout and Brexit, the demand for buoyant businesses on sale is forecasted to continue as the economy recovers from the pandemic, with large corporate acquirers looking for strategic diversification through acquisitions. The main key driver of the increasing M&A activity still stands as current capital gain tax rate, and any changes to this tax will influence deal activity going forward.