Tax proposals pose 'disastrous' threat to M&A market

Tax proposals pose 'disastrous' threat to M&A market

Tax proposals featured in the general election campaign could have a disastrous effect on merger and acquisition activity in the advice market, advisers have been warned.

Bosses at companies such as Gunner & Co and Soprano Mergers and Acquisitions warned the suggestion to abolish entrepreneurial relief on the sale of businesses, which featured as part of Labour’s manifesto, would see fewer sellers come to market.

Consultants have also suggested the manifesto pledges to scrap ER, as well as the Conservative's proposal to review and reform the relief, could make it less appealing to start an advisory business in the first place.

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Louise Jeffreys, managing director of IFA broker Gunner and Co, said the fear around entrepreneurs’ relief being scrapped was one of the biggest concerns for sellers and one which had contributed to motivations to sell over the past year. 

Ms Jeffreys said: "That would effectively double the tax a business seller would pay when selling the shares of the company. 

"That has certainly been a motivation to bring sales forward in the timelines of sellers way before any election has been set. 

"Furthermore we could assume that with a less business-friendly administration in place, smaller buyers may be less inclined to grow through acquisition - decreasing the buyer pool and therefore the choices for sellers."

Ms Jeffreys added the risk of sellers pushing deals to complete as soon as possible, to be followed by a drop off in the market, had now become a "more real fear". 

Stuart Dyer, chairman of introducer Soprano Mergers and Acquisitions, agreed the proposal to scrap entrepreneurs’ relief would cause a shift in the acquisition market but warned some, predominantly older, advisers would simply have to take the hit on a higher tax bill. 

Mr Dyer said he predicts the change would have a greater impact on the exit plans of principals who are younger but are not desperate to sell. 

He added: "The main difference is going to be in the mid-section, the larger businesses owned by younger entrepreneurs that are prepared to wait to see if things will change over a period of time. I think it will cause them to re-think and be a little bit more patient."

The advice industry has witnessed a healthy acquisitions market this year, with consolidators completing a steady stream of smaller deals and a number of high profile advice players such as Quilter and Tilney completing acquisitions and mergers of their own.

Under current rules, advisers who sell their business, providing they have owned it for at least two years before the date of sale, qualify to pay less capital gains tax. This entrepreneurs’ relief means sellers now pay 10 per cent tax on capital gain, as opposed to 20 per cent.

However, Labour announced it would seek to abolish this policy. Its manifesto said: "It is now widely recognised that entrepreneurs relief in its current form cannot continue, so we will scrap it and consult on a better form of support for entrepreneurs which is not largely just a handout for a small number of people."