Mergers and acquisitions (“M&A”) are increasingly common however, the increasing frequency of M&A deals has raised concerns regarding the tax implications. There is a growing debate about whether Capital Gains Tax (“CGT”) rates should be increased for M&A transactions. Proponents of the increase argue that higher CGT rates will generate more revenue for the Government arguing that M&A deals often result in significant capital gains for the seller, which are taxed at a lower rate than income tax. Therefore, an increase in Capital Gains Tax rates for M&A transactions would ensure that the tax system is equitable.
Overall, the public appears to back an increase (source: YouGov January 2023), with 41% supportive and 30% opposed. Conservative voters tend to be against an increase, with 36% in support, and 44% opposing, whilst Labour voters are supportive by 53% to 21%.
In the November 2022 budget, the Government significantly eroded the Capital Gains Tax annual allowance in an attempt to raise revenue. The current exemption of £12,300 will drop to £6,000 in April 2023 and from 2024, this will further reduce to £3,000. However, most M&A deals are well above this bar, so any allowance erosion impacts investors more than entrepreneurs. Today’s Capital Gains Tax rate if you sell 51% or more of your shares to an employee ownership trust is 0%. Otherwise, the rate is 20% on the sale of shares reduced by the lifetime business asset disposal relief to 10% per executive shareholder who has held shares for more than 2 years. Compared to income tax these are very attractive rates.
The next general election in the UK will be before 24th January 2025, and after 14 years of a Conservative government, the polls suggest that Labour will most likely win. Given that its voters support raising Capital Gains Tax, they will likely increase the rates, and therefore the looming clock ticks.
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