UK budget affects PE

UK buyout activity could get a boost thanks to the latest Budget announcement on capital gains taper tax relief for individuals. From April 6, 2002 higher rate tax payers will see their capital gains tax liability drop to 20 per cent once the assets have been held for a year and after two years or more the rate tapers off to 10 per cent.

Such a significantly lower capital gains tax may encourage entrepreneurs to exit their businesses more rapidly and, in time, boost UK M&A and buyouts activity. Assets that qualify for this level of taper relief are specific but in general terms include private company shareholders and some listed companies, if the shareholder is an employee.

The other significant tax change announced in the Budget affects corporate, rather than individual investors and is a tax exemption relating to capital gains arising from substantial shareholdings. Simon Witney, partner at European law firm SJ Berwin, notes: “The stated intention is to enable companies to make decisions about selling on a commercial basis rather than being influenced by their tax position, and if that encourages larger groups to restructure it could generate buyout opportunities.”

The exemption, effective April 1, 2002, relates to capital gains arising from disposals by trading companies of holdings of at least 10 per cent in other trading companies. Both investor and investee company must be carrying on a trade before and after the disposal meaning investment funds cannot usually benefit from this exemption. “This exemption is good news for UK companies since, provided you meet the 10 per cent threshold, you won’t need to pay tax.”

As for wider implications, Witney says: “Other European countries, such as Belgium and Holland have traditionally been the preferred locations for holding companies, with the so-called participation exemptions’ which operate there making them attractive. Now that the UK has an exemption system too, it has much to offer as a holding company location, and if this encourages multinationals to include the UK in their structuring, the business which flows in will undoubtedly benefit the economy.”