Amidst concern about the change to Capital Gains Tax potentially disrupting the M&A market, there is a level of relief amongst deal doers. By Jonathan Grant, Partner and Head of Corporate, DMH Stallard
With scare stories rife, many businesses advanced their plans to sell ahead of the budget, and a number of deals were completed to an accelerated timetable. However, this year has also seen deal values rising again, and while some sub-£5m deals were able to accelerate to beat the Budget, larger deals (£10m+ typically with corporate or institutional buyers) were not prepared to rush the process.
Previous Budgets have seen buyers and sellers sharing responsibility for tax increases, with buyers increasing the price to share some of the increased tax burden on sellers. This year, there has been an increase in Capital Gains Tax (CGT) for sellers, but buyers also face higher operating costs because of the increase in employers’ National Insurance. My limited experience to date suggests that these two issues are cancelling each other out, when it comes to any attempt by sellers to renegotiate.
For most active deals, the response seems to have been that buyers and sellers will each bear responsibility for their own increase in the tax burden. Provided the business continues to perform, deals do not seem to have derailed.
Tax changes at a glance
Entrepreneurs and family business sellers found that the 20% rate of CGT previously available on the sale of shares increased to 24% with immediate effect (higher rate tax payers). Changes were also made to Business Asset Disposal Relief (BADR), with effect from April 2025 and again in April 2026.
BADR allows sellers to pay a reduced rate of 10% on the first £1m of gains made on the disposal of a trading company in which they were at least a 5% shareholder for two years, and for the same period where they were office holders or employees. Most entrepreneurs and businesses sellers achieved 10% CGT for the first £1m, then 20% thereafter.
With effect from April 6th 2025, the 10% BADR will increase to 14%, and from April 6th 2026, it will rise to 18%. The impact of the BADR will clearly have a more dramatic impact on smaller deals, or where there are a number of shareholders in the same family. On an individual basis, the tax impact will be £40,000 after April 6th 2025, and £80,000 after April 6th 2026. However, given the new rate of 24%, they still enjoy a reduction for 2025 and 2026 of 10% and 6% respectively.
If you combine the BADR adjustment with the CGT increase, then from April 6th 2026, a qualifying seller receiving £10m, will pay £440k more in tax then they would have done before the 2024 budget.
What will the market be like moving forward?
Leading up to the Budget, we have seen an increase in deals with a value over £10m, suggesting increased confidence from larger investors and corporate acquirers. At the same time there has been a high number of management buyouts and Employee Ownership Trusts (EOT), often below £10m.
I expect both parts of the market to continue and accelerate over the next year, particularly when it comes to sales to EOTs, given that such sales are not affected by the new changes, so sellers can still benefit from a full CGT relief. There is a strong desire amongst business owners to sell, combined with economic growth and confidence.
Overall, the impact of macro events will have a greater impact on deal values over the next year than the changes in tax rates: a Trump win in the US, and an easing of international tensions across the World (should that come to pass), combined with lower inflation and continued growth.
The outcome is not yet certain, but there are reasons to remain positive!
