Record NW deal activity predicted after mooted changes to capital gains tax

The appetite for business owners to do deals will remain strong in 2021, particularly in the first quarter, according to MHA Moore and Smalley’s head of corporate finance.

Andrew Feeke believes widely anticipated changes to the capital gains tax regime next year, together with strong liquidity among funders, could lead to a record volume of deals between January 1 and April 5.

Andrew made the comments as the firm revealed it advised on corporate transactions and fundraising deals with a value of more than £200m in the 10 months to October 2020. These deals included:

Andrew said:

“We mustn’t forget that this has been a very challenging time for many people and communities, as well as for businesses and their owners. At the same time, it’s also been encouraging to see many businesses are still growing, creating jobs, and attracting investment.

“Our deal activity has remained strong throughout the pandemic period with our team kept busy on deals spanning different sectors, including cross border deals. Many of the legal advisors and private equity contacts I speak to are witnessing a recent increase in activity levels.

“Our short-term pipeline of deals remains incredibly strong and a key driver of this is the possible increase in capital gains tax rates, likely to be introduced from April next year. We’re looking at a lot of MBO activity and Employer Ownership Trust transactions as owners, particularly those with cash on the balance sheet, look to accelerate transactions to realise value from the business before any potential changes come in.

“With CBILS support ongoing, we should also see plenty of liquidity remaining in the market into the early part of next year. I think we may then see a pregnant pause in transactions after quarter one, which will coincide with funders reviewing the market and their own balance sheets, perhaps assessing where they may be overexposed and reviewing their target sectors.”

Andrew believes that even after some of the government loan schemes end, there will still be good levels of deal finance available as alternative funders look to continue their growth and enhance their client base. In the near term, there will remain strong appetite from private equity funders for well-managed businesses in the tech and healthcare sectors according to Andrew.

“Both prior to and throughout the pandemic we’ve seen an ever-increasing drive towards business models that offer software as a service, with long-term secured recurring revenues driving higher multiples. Those tech firms that are serving the healthcare sector are very sought after, with the health sector showing consistent growth and limited exposure to negative market factors,” added Andrew.

“With the rapid adoption of digital technologies across the public spectrum, I also predict an increasing amount of expansion and consolidation in the digital and creative sector as corporates pivot their marketing channels from ‘traditional’ to digital.

“On a more concerning note, I suspect there will also be an increase in business turnaround transactions when some of the pandemic support, such as Time to Pay arrangements come to an end and we may well see  a number of pre-pack deals going through. The timing of the return of ‘Crown Preference’ could not be better from a HMRC perspective, providing HMRC with more power in an insolvency process.

“There is obviously uncertainty over capital gains tax after April, which will probably weight the majority of next year’s deal activity in quarter one,” adds Andrew. “However, I’m confident that even if we see a dip in activity for a few months, it will stabilise in the second half of next year and we’ll still see a similar amount of deal activity overall.”

Chancellor Rishi Sunak asked the Office for Tax Simplification (OTS), an independent arm of the Treasury, to identify opportunities to simplify capital gains tax in relation to individuals and small businesses.  

Higher rate taxpayers currently pay a rate of 28% on gains on property and 20% on gains from other chargeable assets like shares. Basic rate taxpayers pay 18% on gains on property and 10% on other assets.

A reduced rate of capital gains tax of 10%, formerly known as Entrepreneurs Relief (now Business Asset Disposal Relief), also applies to individuals selling all or part of a business, providing certain criteria are met.

The OTS published a report in November 2020 in which it recommended bringing capital gains tax rates more in line with income tax rates and a reduction in the annual tax allowance. With this as a backdrop, it is thought the chancellor could implement some changes to the tax rates as part of his next budget.