Tax-driven deals expected

Alistair Darling’s decision to scrap existing reliefs and create one flat rate of capital gains tax could lead to a flurry of business sales, according to tax experts and corporate financiers.

The Chancellor of the Exchequer, as widely expected, decided to scrap taper relief in his Pre-Budget Report. The use of the relief by private equity executives to reduce the rate of capital gains tax from 40% to 10% had been criticised by various parties.

Even Nicholas Ferguson, chairman of SVG Capital, had said this meant that buyout executives “paid less tax than a cleaning lady”, since they could claim CGT relief on their investments in portfolio companies.

Under the previous regime shareholders in unlisted trading companies could claim the full relief after two years of holding shares. Now, all capital gains, made from the start of the next tax year on April 6, will be taxed at a flat rate of 18%.

Howard Leigh, managing director of Cavendish, a corporate finance boutique that specialises in selling businesses, said: “There will be a flurry of activity in the coming months. I have already had calls from several people.”

Anneli Collins, head of private equity tax at accountants KPMG, said: “If an entrepreneur was really thinking of selling his business over the next year, then he would be wise to bring it forward so the tax rate would be 8 percentage points lower.”

Some thought that there would be little difference, though, in the flow of deals.

Rob Donaldson, Baker Tilly’s head of private equity and M&A, said: “We do not expect the change to have a significant short-term effect on M&A activity or the volume of private equity deals.”

Leigh added that some owners of businesses might try to crystallise the capital gain before the end of the tax year. “Twenty-two years ago capital gains tax went up from 30% to 40% and many tried to crystallise gains by selling their businesses to a shell company.”

However, he added that while people were looking at such measures, it was not clear whether they would meet strict legal criteria.

Leigh added that he did not expect a drop-off in deals after the end of the tax year. “If you miss the deadline, then 18% is not as high as all that. It still makes sense to sell up rather than take out dividends and be taxed on the income.”

KPMG’s Collins said that companies with major property holdings stood to benefit, as the CGT rate on property gains had fallen, even after the reliefs had been withdrawn. “Hotel and pub companies doing lots of deals will benefit,” he said.