What are the key tax considerations when it comes to M&A?

Over the last six months, there has been a significant increase in M&A activity in the UK. This was at least in part initially driven by speculation that changes to Capital Gains Tax (CGT) would be included in announcements as part of the Budget in March 2021. While the Chancellor ultimately did not increase CGT, the boom period for M&A has persisted, with the market continuing to be incredibly buoyant.

However, CGT is just one area to consider when it comes to M&A. Here, we take a high-level look at what other tax considerations need to be taken into account when it comes to acquiring or disposing of a business in England.

What taxes are potentially payable?

The main taxes that need to be considered are corporation tax, CGT, Stamp Duty Land Tax (SDLT) and stamp duty. There may, however, be certain exemptions or reliefs available on these taxes, and advice should be sought as to how to ensure that the transaction is completed in the most tax efficient way.

CGT (or corporation tax on chargeable gains when the seller is a corporate) will generally apply to the gain made by the seller on the disposal of the business or shares in a company.

A balancing charge may be applicable if a company disposes of an asset – where capital allowances have previously been claimed – at more than its tax written down value.

CGT (or corporation tax on chargeable gains) is payable on any gain arising on the disposal of an asset. The rate of this is either 10% or 20% (or 18% and 28% respectively if the asset is land or a building), depending on the relevant tax band and if any reliefs are available.

If the disposal involves the transfer of land or buildings, then SDLT may be payable. VAT may also be payable. No VAT is payable on the transfer of shares but stamp duty will normally be payable at the rate of 0.5%. Reliefs are available to reduce or exempt any liability to SDLT or stamp duty.

What tax reliefs are available?

When it comes to corporation tax, there may be reliefs available by off-setting historic losses. However, these are subject to a range of conditions and limits. The seller of the business can also potentially claim rollover relief, if they re-invest the proceeds of the sale in specific assets, including machinery or land. There are strict timeframes in place that need to be adhered to when it comes to rollover relief though.

A transaction may also qualify for TOGC treatment if the assets are sold as a going concern.

In terms of CGT, business owners have already seen Entrepreneurs’ Relief – which offered a 10% CGT rate on £10M of lifetime gains – changed to Business Asset Disposal Relief (BADR), which offers the 10% rate on only £1M of lifetime gains.

If a subsidiary is sold by a corporate seller, then a Substantial Shareholding Exemption may, subject to various conditions, be available to eliminate any liability to corporation tax on chargeable gains.

There are also certain ways to structure a transaction to help minimise the tax burden. This is a complex area and so it is hugely beneficial to take expert advice ahead of proceeding with any M&A activity.

We regularly advise clients on the tax aspects of M&A. Please get in touch info@ts-p.co.uk if you have any questions.