Mergers and Acquistions Tax Environment
An Evolving Tax Environment
A solid understanding of the tax environment is critical when planning a merger or acquisition.
Global tax regimes vary; however, many offer allowances to assist with business Capital Gains. In particular, a review of Entrepreneurs’ Relief (“ER”) and Substantial Shareholding Exemption is critical when considering the UK M&A landscape.
Entrepreneurs’ Relief on Capital Gains Tax has now been in force in the UK since 2008. ER enables individuals to sell their interests in most businesses and to pay tax at a preferential capital gains tax rate of 10%, instead of treating the proceeds as income.
The aim is to aid entrepreneurship and to encourage reinvestment in business; however, in 2014 alone, the tax cost to the UK Treasury was £2.9 billion, significantly higher than £0.9 billion in 2008.
Understandably, HMRC has tightened the rules in many areas; however, with the growing pressure to increase tax revenues, it may only be a matter of time before Entrepreneurs’ Relief is altered.
There is speculation that the government will do this by excluding cash reserves. A simpler option would perhaps involve reducing the lifetime relief limit from £10 million or increasing the Entrepreneurs’ Relief rate.
With calls to scrap the entrepreneur’s relief from thinktank the Resolution Foundation, this year’s Autumn budget could be make or break for this tax allowance.
Substantial Shareholding Exemption (“SSE”)
Substantial Shareholding Exemption can also play an important role in selling a company.
SSE is a long-standing relief from Corporation Tax available to trading companies who sell their shares in another trading company in which they have held at least a 10% interest of the ordinary share capital, for at least 12 months in the previous two years.
Recent changes to the tax system have removed the previous requirement for the company making the share disposal to be a “trading” company (or at least a member of a “trading” group) both before and immediately after the disposal.
Recognising the need for detailed M&A tax planning and its benefits is a vital part of preparing a business for sale.