Tax change expected to generate a surge in private company M&A transactions

The effect of the changes will be to almost double the effective capital gains tax rate applying on disposals by individuals and trusts from as low as 10%, to an 18% flat rate. For a typical private company shareholder, who has spent many years building up a business of substantial value, the proposed changes could prove to be a costly experience - a typical tax bill on a £15 million capital gain could increase from £1.5 million to £2.7 million.

Commenting on the recent announcement, Jason McBurnie, assistant director with PricewaterhouseCoopers Corporate Finance, noted:

“Whilst it is important not to allow key strategic decisions to be determined entirely by their tax treatment, the fact remains that private company shareholders contemplating selling their business are now seriously considering whether to accelerate their plans to take advantage of this limited window. The tax savings are significant, and we are already experiencing feedback from entrepreneurs who are determined to complete transactions prior to the change in the rules.”

McBurnie added: “The tax advantage of a quick sale may appear compelling, however it is worth noting that careful transaction planning is one of the key value drivers on exit, and a hastily executed sales process could destroy value. We have a vast range of experience in executing successful sales processes including Caledonian Alloys, LCH Generators, Henry Brothers BMW, William Wilson and JP Corry. These deals were concluded on a range of timetables, and we’d be pleased to meet shareholders to discuss how best to meet their deal objectives.”

Notwithstanding the forthcoming changes, the position for shareholders looking toward a longer term exit is not necessarily bleak, as Judith Wilson from PricewaterhouseCoopers’ tax department explains:

“There will inevitably be a number of winners and losers from the proposals announced by the Chancellor, For example, those shareholders owning shares in property investment companies who will see a reduction in the tax rate from 40% to 18%, and investors not currently qualifying for full business asset taper relief who are also likely to see a reduction in their tax liabilities on disposal. However, where business asset taper relief is available, it will become more important for investors not planning a disposal before 6 April 2008 to maximise existing reliefs.

Of course there are also individuals who have already disposed of assets but still hold loan notes which may not be redeemable until after 5 April, 2008 and who, without further planning, would also be in a worse position. We would be happy to share our thoughts with those individuals on what planning opportunities exist.

It is important to note that the changes announced have not yet been legislated, and a number of industry bodies including the CBI and the Federation for Small Businesses are lobbying the Treasury in an attempt to force a rethink. Whilst this makes the current environment somewhat uncertain, it emphasises the need for early and careful consideration of the consequences of any plans for a quick sale”.

In summary, whilst there can be no substitute for proper strategic planning, there remains a window of opportunity which may be appropriate for shareholders seeking to sell. Our Corporate Finance and Tax teams can work together to examine the most appropriate exit timing for you and your business, and to implement a process which maximises the net value to shareholders.

Contact details
Email: Jason McBurnie
Tel: +44 (0)141 245 2122

Email: Judith Wilson
Tel: +44 (0)141 242 7280