Budget 2020: the M&A market

by David Scrivener

The Budget on Wednesday contained only a surprisingly small number of measures that will directly affect the M&A market. However, one of these changes will be one that will send ripples through parts of the industry, and that is the change to Entrepreneur’s Relief.

The announcement by the new Chancellor, Rishi Sunak, that the lifetime limit for the relief will be reduced from its current level of £10m, down to £1m, will have the effect of increasing the tax liability of many small and medium-sized enterprise owners when they come to sell their businesses. It is also likely, at least in the short term, to reduce activity in the M&A market whilst potential sellers become accustomed to the idea of paying 20% Capital Gains Tax on much of their gains rather than the previous 10%. I would be cautious about overreacting however, as this merely puts us back to the position in early 2010 and, furthermore, where there are multiple shareholders in the selling entity the effect is reduced. 

In the long term it is hard to estimate whether the change will have the ongoing effect of depressing transaction numbers, and to what extent. Personally, I do not believe that it will. Entrepreneur’s Relief will still be here, and the difference between Capital Gains Tax rates and income tax rates still exists.

What does make matters somewhat worse is that the reduction has come in with immediate effect, rather than from the start of the new tax year on 6 April. This will cause headaches for anyone who is currently part way through the process of a sale or purchase and I expect that a non-trivial number of larger deals may fall over, or face the need for renegotiation, in the coming days and weeks.

Looking on the bright side, many in the profession feared that Entrepreneur’s Relief would be scrapped altogether. It was therefore reassuring to learn that it will remain, even if in a reduced state. Although it has its critics, I believe that the relief forms an important part of a progressive taxation system because it sends a message to prospective and current owners of smaller companies that their hard work and investment will be rewarded, if they can create a successful and thriving business.

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David Scrivener

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