The 2021 Budget and M&A

Many in business will have a keen eye on Rishi Sunak's Budget announcement that is due on 3rd March. As always, there is intense press speculation as to the measures that may be announced.

Given the ongoing COVID-19 pandemic and the unprecedented hit the national economy has suffered over the last 11 months, the Chancellor is facing pressures arguably never seen before now in peacetime Britain.

It has to be hoped that (with the successful vaccine rollout gathering pace) the Chancellor's attentions may start to turn more towards the post-pandemic economy. Although, inevitably, his fiscal and tax policies may be largely shaped by the question: how do we fill the hole in the public finances caused by COVID-19?

There is a sense of déjà vu.  As we wrote last year, there was much speculation heading into Rishi Sunak's first Budget on possible changes to (as it was then) entrepreneurs' relief. We saw owner managers racing to do deals ahead of the budget, and taking aggressive positions in negotiations about who should bear the costs of any change to tax rates.  And then, of course, market sentiment rapidly changed as the pandemic neared.  As deals became less certain, the positions sellers adopted often changed, as speed for some became everything.

This year CGT is once again a hot topic, with suggestions of CGT rate increases giving rise to similar uncertainties for live and potential M&A deals.  We're incredibly busy across the insurance, financial services, technology, retail, consumer products and various other sectors. As was the case last year, the uncertainty around CGT has been far from helpful. The best advice remains what it was a year ago – given the uncertainty, move deals along as fast as is sensibly possible, to mitigate against any changes that may be announced as to rates of CGT.

If a deal cannot be completed before 3 March, then buyers and sellers should look to conclude unconditional sale contracts by 5 April 2021 if CGT is a concern. It is hoped that any potential CGT changes announced by the Chancellor would only take effect for share disposals from 6 April 2021, at the earliest.

Elsewhere, possible changes to the UK corporation tax rate (currently 19%) have been mooted.

A note on CGT rates

CGT is currently charged at 20% (for higher and additional rate taxpayers) on gains that are not "upper rate gains". A higher rate (currently 28%) applies to gains realised by those taxpayers on (i) gains related to residential property, and not qualifying for relief, and (ii) carried interest gains.

As a result of changes announced in the 2020 Budget, a lower CGT rate (at 10%, on the first £1m of lifetime gains) applies to assets qualifying for Business Asset Disposal relief (BAD). This was previously known as entrepreneurs' relief.

These current CGT rates compare favourably with current income tax rates (being 40% for higher rate taxpayers and 45% for additional rate taxpayers).

In November 2020 the Office of Tax Simplification (OTS) published its first report on its CGT Review. One of a number of recommendations made by the OTS was for CGT rates to be "more closely aligned" to income tax rates.

Any CGT rate changes announced in the 2021 Budget could take effect from one of 3 obvious potential dates:

• Immediately, to disposals taking place on or after the date of the Budget announcement (ie from 4th March).
• To disposals taking place from the beginning of the next tax year (6 April 2021)
• To disposals taking place from the beginning of a subsequent tax year (e.g. 6 April 2022)

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

Assuming that any changes to CGT would not have immediate effect, the worst-case position would be that eligible sellers would have just over a month from the Budget day to be able to access current CGT rates.