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City law firm RPC comments on UK Budget presentation - M&A, the Budget and Entrepreneurs' Relief – time to act?

Published on 11 March 2020

Ahead of today's Budget announcement by the UK Chancellor Rishi Sunak, the city law firm RPC takes a look at its impact for business.

M&A, the Budget and Entrepreneurs' Relief – time to act?

UK businesses will keep a close eye on Rishi Sunak's first Budget announcement that is due today. It is impossible to escape the Government's levelling up agenda and current market and health turmoil in the pre-budget media coverage.

His budget will focus heavily on the economic impact the spread of the coronavirus could have on the UK economy both in short term as well as the long term. The chancellor is likely to draw up plans to deal with the economic impact if possibly millions of workers were forced to stay at home to soften the impact on businesses. At this time we are all thinking much wider than the economic and social cost of the virus and possibly required changes in behaviour, with our thoughts focusing on those directly and indirectly affected by the outbreak.

Entrepreneurs' Relief

"Move M&A deals along wherever possible, to mitigate any changes" – James Mee, Corporate Partner 

For business owners, much has been said about changes to entrepreneurs' relief (ER). This has remained the case despite the resignation of the previous Chancellor. There is speculation as to possible ER changes which range from relatively minor tweaks to full abolition.

For live and potential M&A deals in the insurance, financial services, technology, retail and other sectors where we're currently very active, the uncertainty around ER has been far from helpful. The best advice – given the uncertainty – has been to move deals along wherever possible, to mitigate any changes that impact on the availability of ER.  

Where possible, buyers and sellers should look to conclude unconditional sale contracts by 5 April 2020 at the latest. It is hoped – though not yet certain – that any ER changes would only take effect for share disposals from 6 April 2020. 

That said, it is possible that any changes might be effective from the date of the Budget announcement, or shortly after.  A more generous change in regime would have changes effective from 6 April 2021.

ER and its tax implications

"ER is a highly valuable form of tax relief. It is available to certain individuals who realise certain types of qualifying gains."Ben Roberts, tax expert and Senior Associate.

Most commonly it applies to employees and office-holders on sales of shares in trading companies in which they have sufficient share capital, voting and economic interests. It currently provides for a reduced (10%) rate of CGT on the first £10m of qualifying gains, which equates to a potential tax saving of up to £1m for qualifying taxpayers.

The 2019 Conservative Manifesto said simply that the Conservatives would "review and reform" ER. Some press reports have speculated that the current lifetime cap on ER might be reduced. Abolition of ER might seem an unusual choice for a Conservative government but given the levelling up agenda, perhaps not. The most recent press reports suggest that full abolition of ER is being seriously considered.

A further key (as yet unanswered) question is from what date will any changes, announced on 11th March, take effect? There are 3 obvious potential dates:

  • Immediately, to disposals taking place on or after the date of the Budget announcement (ie from 11th or 12th March). Ordinarily, we would have regarded this as unlikely, as immediate changes tend to be to clamp down on perceived tax avoidance.
  • To disposals taking place from the beginning of the next tax year (6 April 2020).
  • To disposals taking place from the beginning of a subsequent tax year (e.g. 6 April 2021).

It is to be hoped that the Government will consult on any proposed changes to ER, allowing affected taxpayers and industry bodies to comment on any proposals.

Assuming that any (major) changes to ER would not have immediate effect, the worst-case position would be that eligible sellers would have less than a month from the Budget day to be able to access ER in its current form.