|
Speaker
|
Transcript
|
|
Guy Broadfield, Senior Associate
|
[Music] Hello and welcome back to another episode of the Death & Taxes - and everything in between podcast, a weekly podcast by the Private Wealth team at Burges Salmon. I'm Guy Broadfield, and I'm a senior associate in the Private Wealth team. In this fifth and final episode of the season I'm joined by my colleagues Dominic Davis and Julie Book, to discuss the impact of the Budget on entrepreneurs and family businesses. Dom and Julie advise on complex M&A deals and the full range of equity transactions, as part of our Corporate Finance team. Dom is a partner and Julie is a director, and together we work closely to support our entrepreneur and family business clients and have been particularly busy in the run up to the Autumn Budget on the 30th of October, and since.
[Music] So, firstly Dom and Julie welcome back to the pod.
|
|
Julie Book, Director
|
Thank you.
|
|
Dominic Davis, Partner
|
Thank you very much, good to be back.
|
|
Guy
|
It's lovely to have you back.
One month on from the Budget we thought it'd be helpful to evaluate the scene for entrepreneurs and family business owners there's a lot that's going on at the moment but I think perhaps before we get into what clients should be thinking about now, Julie it'd be interesting just to hear your thoughts on what was happening pre-Budget, clearly a very busy time, but what were the main drivers and market factors that you saw in the runup to the announcements on the 30th of October?
|
|
Julie
|
Yeah sure, no it's a good to sort of look back at it now. So I think if we step back to midsummer, it was probably end of July, early August when we saw a real ramp up in contacts from clients and there was a huge number of deals that they were looking to have completed by the 30th of October and in terms of the types of clients and deals we were seeing it was a real mix. It was a mix that were deals that were already well underway but where the timetable got accelerated to complete it by the 30th of October. Then you had deals which had actually fallen over either earlier that deal, or some they had fallen over in 2023, where they came back to life in a different form where they'd managed to find a buyer and were looking to complete those by 30th of October. And then probably the most challenging was where you got a completely new deal coming online and also looking to complete it by the 30th of October.
So I think we found by sort of end of August, early September where the media was really hyped up that the rates could rise sort of late 30s, perhaps into the early 40s, there was quite a sort of buzz and furore of getting deals done by 30th of October. We found it didn't really drop off even though there was probably as you went into October it was tempered, wasn't it, slightly where it saying actually the rise won't be as high as late 30s, but by that point there was still that real fear there was going to be huge changes in CGT, so people really were still pushing on to get things done by 30th of October.
|
|
Guy
|
Yeah, certainly some tax motivation there to get things done before the announcement and as it turned out, good to have done that given that the increase in rates came in with effect from the day of the Budget from midnight on the 30th. So I know in a couple cases deals were done relatively late on the 29th and all good, for those shareholders certainly.
I mean it's been interesting seeing the commentary in the Press recently, you know, the Financial Times at the weekend was talking about UK M&A activity really being quite impressive in terms of numbers and, you know, announcements of some very big takeover offers in the market at the moment. I mean Dom, what have you seen since the Budget, so continued pressure on deals, or are people taking stock and waiting to go again at some point in the future?
|
|
Dom
|
To be honest it's been quite nice to focus on the actual deals themselves rather than speculate as to forthcoming tax changes. So that firm deadline of the 30th of October, as Julie was saying, really drove deal timelines. What we're now seeing, which we see every year at this time of year, is Christmas and New Year becoming a deadline for people, so that is certainly focusing minds again.
More generally, I think the number of live transactions that we as a team, of 50 Corporate Finance lawyers, have on the decks remains very high. So compared to 12 months or so ago, I think that there's a lot more deal volume there and we're certainly seeing a lot of new opportunities in terms of potential deals next year. So I think relatively healthy going into the last couple of weeks of this year, but looking ahead in into the long-term next year. That's again across a range of sectors, as Julie was saying, as we've experienced today.
|
|
Guy
|
And is that both buy side and sell side, in your case?
|
|
Dom
|
Yes, I mean I think what we're saying there were every deal under the sun was trying to complete, it seemed, ahead of October. Some deals just were not at the right stage. So as Julie was saying, even though some new ones hit the decks and came on very quickly, others were just not in a stage to complete. So actually we're acting - I've got a couple on my desk that are sell side that have fallen now into probably January completions, so we're dealing with a rump of Budget deals if you like that we're never going to get there. But separately there are number of transactions that the team is dealing with that are simply not related to the Budget whatsoever, so some on the public side, public M&A, but predominantly sell side and buy side on the private company.
|
|
Julie
|
I think the one thing I'd add to that is we're still seeing a lot of international buyers. There's been no let-up in, sort of, particularly US, German buyers coming onboard for UK companies and the Budget hasn't changed that at all, it doesn't seem. That's been a lot of our opportunities recently.
|
|
Dom
|
Yeah and I think that's absolutely right and that's where our network of overseas firms that has served us so well continues to do so. So as Julie is saying, Germany and the US a good source of buyers coming to the UK Market, which shows that the UK remains a very attractive place to invest.
|
|
Guy
|
Yeah I mean, it sort of underlines the point made by the FT that, you know, the UK is one of the most active hubs in Europe for deals this year. And for those who are interested the value of M&A deals involving UK companies, whether buying or selling, this year has hit $306 billion so far, so some some big numbers there across the market.
And so clearly, you know, we set up a podcast mainly about taxes, it's right to look at some of the detail of the announcements and what effects we think they will have on the market. I mean, at the outset if we look at increases to National Insurance contributions, clearly that could have a significant impact on profitability and just the sort of operational side of the business from April 2025 onwards. Dom, what do you think, what's the impact going to be there on deals or indeed valuations over the next few months?
|
|
Dom
|
Well it's interesting because in the run-up to the Budget all of the focus was on the potential Capital Gains Tax changes. We'll come on to the changes to Inheritance Tax in more detail, but just in terms of the other area of the Budget that's going to heavily impact businesses is the cost of running a business itself. So you've got the well documented National Insurance changes and changes to minimum wage and, I think in terms of how that's going to impact deals, I think for those clients who are contemplating a potential exit in the coming months, I think it's going to be a question of sitting down with their advisors early to assess the impact on future earnings and financial projections that will be very important to prepare ahead of engaging with any buyers in terms of a potential exit.
So in the podcast that Julie and I joined, some time ago now, we talked about the need for really early planning both on the legal side and accounting side and I think that just reinforces the importance of dealing with the financial due diligence and getting ready for that very early on.
|
|
Guy
|
And so I mean that that could certainly affect business owners, entrepreneurs, who are looking to get a sale away and what they might hope to take off the table. If we take a step back and look at their individual position, so leaving leaving aside the company, clearly in terms of what I do day to-day as a tax and trust lawyer there are some pretty fundamental changes there to structuring and to individuals tax position.
I think for the purposes of this pod we're going to focus on two main areas one is entrepreneurs and the second is family businesses. They are subtly different and will be impacted in slightly different ways. I mean, for those entrepreneurs who are looking to sell, then clearly, you know, the increase in Capital Gains Tax to 24% with effect from 30th of October is a big change. Maybe not as big a change, Julie as you said, with an increase rate of up to beyond 30%, but nonetheless can make a difference.
Important to note that the rules with regards to business asset disposal relief are changing with effect from April 2025, so the 10% rate will be increasing to 14% from then, and then going up from 14 to 18% from April 2026 onwards. I mean, Julie do you think that will impact deals in any way, in terms of people looking to get things away pre-April 25 to secure their BADR? Acknowledging it's only you know up to gains of a million pounds.
|
|
Julie
|
Yeah, I think to date we've not really seen much impact and to be honest probably don't expect to see much impact. I think you're talking - it's potentially a benefit of £40,000 for people so all be it, it is money, it's relatively limited compared to the other tax relief that they could be - or the impacts that they could be looking at. So I think it might be a factor, but it won't be a defining factor for people in trying to push through sale before April.
|
|
Guy
|
And we'll come on to talk about the Inheritance Tax changes with regards to family business and it is true that there's going to be an impact there on the - what an individual's position with regards to their shareholding should they die, it also will limit an individual's ability to put shares into trust tax-free. So I suppose from my perspective we might see a reduction in the use of trusts to hold shares pre-sale because it'll be more difficult to get more value in to a trust pre-sale without an immediate charge to tax.
So you might see that people focus more on post-sale structuring and wealth planning, rather than using a trust as a vehicle to hold shares pre-sale. But that remains to be seen and there's still a window for that type of trust planning between now and April 2026. I suppose really Dom, I mean, do you think these types of Inheritance Tax changes, whilst they will affect entrepreneurs do you think that's a key motivation for them, or is it just something that comes along with other deal considerations?
|
|
Dom
|
I think really the latter, I don't think, as I completely agree with Julie, I don't think the business asset disposal relief changes in April next year, I don't think we're going to see another surge and I think if you were to take a survey of a 100 entrepreneurs I would think very few would state that Inheritance Tax planning was top of their list in terms of driving their strategy. Certainly a factor, and again underlies the need to sit down with advisers ahead of any exit. So to consider whether, as you say and as we've seen today, there's any pre-exit tax planning that they should be doing but as you say I think going forward the focus is going to be on post-exit tax planning.
[Music] So Guy, we've touched on the changes to entrepreneurs. For family businesses, what are the key considerations that they need to bear in mind with the forthcoming IHT changes which are getting more and more attention in the Press, it seems?
|
|
Guy
|
Well I think it's important to distinguish entrepreneurs and family businesses because they have slightly different motivations. Family businesses do often take this long-term view of life and the business and share a vision for the business across generations and yeah you've seen the controversy around the effect of the rules on farming businesses and that's been well publicized and remains to be seen what happens there with regards to the farming community. But the same impact and effect you could see with family businesses, you know, across industry not just in the farming sector and that's part of the problem, or the issue, is that many family business owners have come up with plans with regards to the succession and governance for the business based on the assumption that their shares would qualify for Inheritance Tax relief, in full. So broadly that value would be covered by tax relief if an owner died.
Now the proposed reforms to business property relief, if they are implemented in the form proposed, will change that position considerably and that means that family business owners, whether they're individuals or trustees, will need to review their plans from a tax perspective, succession perspective, and a commercial perspective, to make sure they've got the right things in place.
|
|
Dom
|
I mean it feels that life has just become a lot more complicated for these family businesses, just in terms of the operational costs increasing, as we've touched on, but now you know seismic changes potentially to the Inheritance Tax position. Today, I appreciate it's only been a month, but have you have you seen a rise in terms of the queries you're dealing with from family businesses?
|
|
Guy
|
Yeah, very much so. I mean I think it's important to say that these rules are due to change, with effect from 6th April 2026, so there's not an immediate exposure, but family business owners and their advisers are aware that this is a fundamental change, so it's important to wait for the detail of the legislation and with particular - with regards to the outcome of the consultation on how this affects trusts and trust which hold shareholdings in family businesses.
But really, families do have to start considering how these rules impact them and how they need to revisit and revise their succession and governance plans ahead of April 2026, and what changes they may need to implement. And particularly for older clients, we can come on to talk about it, but there is there is scope for them to pass shares down possibly to the next generation, or possibly into trust, and start the various seven-year rule clock running. So those are discussions that need to start happening pretty soon so that people know their position and can make decisions accordingly.
|
|
Dom
|
And this may be crystal ball gazing, Guy, and it may be one to ask a Corporate Finance lawyer, but I'll ask you. Can you foresee family businesses selling up rather than looking to pass the business down to the next generation as a result of these changes, depending on the consultation and the actual changes that come in?
|
|
Guy
|
Well I think in the first instance families are going to - family business owners are going to have to think about what their new tax position is going to be and what the potential liability might be. They might find that the liability to Inheritance Tax is manageable going forward, but you know, if there is going to be an exposure that has to be paid, and you know tax money has to be found to pay that tax, the question is where does that come from?
|
|
Dom
|
Yeah.
|
|
Guy
|
And if you take, you know, the increases to National Insurance that we've talked about into account, increases to minimum wage, you know, directors of family businesses who come under pressure from family shareholders to increase dividends to cover unexpected tax changes might find themselves in a difficult position. Now query whether you can sell part of a family business easily and box it off to raise some funds for Inheritance Tax, I'm not sure.
|
|
Dom
|
Unlikely.
|
|
Guy
|
That would be, yeah, from the corporate finance perspective. So you know, it might push some family businesses to consider a sale and I know that Sir James Wates has mentioned in The Times that, you know, it could be a situation where family businesses in that position do look to sell and you find overseas investors come in to swoop in on, you know, what have been historically successful family businesses. So there's a wider impact possibly on the UK business landscape.
|
|
Julie
|
And you've mentioned there's a real balance, isn't there, between succession planning and actual commercial operations, for those businesses who perhaps don't want to sell but do want to continue passing down to the next generation. What do they need to think about in terms of their governance arrangements, if you have got an older client for example but they still want to be involved in their business and not necessarily pass on all of their wealth now, are there things that they can think about now?
|
|
Guy
|
Yeah, so I think if you've got individual shareholders who own equity in the family business, you know, they have to revisit their position. They might want to consider making gifts before April 2026, possibly outright to sons and daughters and the next generation in that way. But for those of you who don't want to do that, you know, there's still a window for them to consider transferring shares into trust to be held by, you know, the trustees of a family trust for the benefit of children, grandchildren, and future generations. And that allows you to try and mitigate your Inheritance Tax exposure, get assets into trust before April '26 without an immediate charge to tax, possibly, but importantly retain an element of control and flexibility because those aspects won't be held by those family members who stand to benefit they'll be held by the trustees of which the individual shareholder in question might decide to be one.
And so there's a window to make those types of gifts now before April '26, which a number of clients are considering, acknowledging that, you know, the tax profile of that trust will change after April '26, but these are all important considerations for those shareholders and importantly for the family. There needs to be, I think there needs to be agreement really about the vision and how it's going to work going forward. Who owns what? How does everyone benefit? What are their expectations from, you know, the family's interest in the business? And at the same time that needs to be balanced against the commercial considerations and the wider governance strategy.
|
|
Dom
|
And of course any good corporate lawyer would then say to you, Guy, well that's where Julie and I need to get involved in terms of helping you implement suitable shareholder arrangements or family charters, and the like, to govern that relationship between the shareholders depending on how the share ownership is split with certain parties wanting to retain control, notwithstanding they've gifted shares.
|
|
Guy
|
Exactly, I mean some family businesses operate very well with a relatively informal governance structure for the family. Others have a family counsel or indeed a family charter, as you mentioned, and so I think wherever you are on that spectrum it's important that the communication between the effective family members and possibly trustees is there so that everyone understands and agrees to how to change the proposals, with a view to the continued success of the business and the family.
And yeah to your point Dom, on the corporate governance side, whether it's shareholder's agreements, whether it's, I don't know, dividend policy, all of that all that good stuff, they're important part of the puzzle. And also, you know, to the extent that shares are being held by new family members, possibly younger family members. Asset protection is a key consideration for many family businesses, you know, the impact of divorce on a family business can be considerable, so I think there's also a family law element to this that family business owners will have to explore as well. Possibly looking at pre-nups or post-nups, or so-call marital agreements now. I think that's another key consideration.
|
|
Dom
|
So lots to think about for family business owners going into next year on top of running the businesses. So a busy year ahead.
|
|
Julie
|
And I think it shows doesn't it, that every family is different, there really isn't - there's so many factors to consider that one size doesn't fit all, and well April '26 will come around quicker than we think, isn't it. So Guy, you expected a lot of clients to get in contact and actually just want to sit down with you and talk through what the different options are and give, sort of, the eyes wide open. They can then have a bit of time to think about them.
|
|
Guy
|
I think so, I mean in an ideal world you'd have a bit more legislative detail about what the changes are, that might come in due course, but certainly for older clients they might simply want to take a view based on how the rules are at the moment, look to make gifts or look outright or into trust, possibly before there's that legislative detail, because you know they want to try and make the most of the time they've got left from a from a gifting perspective.
But no, if the rules remain in their current form then it is a considerable change as we we've discussed and like any major life event, families are going to have to rethink and revisit their plans. You know, typically we'll say it's right to review these things if there's a change in circumstances with the family, or indeed the business, or if there's a tax change. And this is an example of that third category and people are going to have to take advice accordingly.
|
|
Dom
|
So Guy, before April '26 then, when should people really start sitting down with their advisers to assess the potential implications for them, their family, and their business, do you think?
|
|
Guy
|
Well it depends whether you're looking at individual shareholders or trustees shareholders. There is a consultation that's due to come out the start of 2025 with regards to how do these rules work with shares held in trust? So if you've got shares in trust, you know, ideally you'd wait to see what those rules are before making any choices about next steps. Individuals may want to wait for the outcome of that consultation before they decide on what to do with their shares, whether it's making outright gifts to children, or indeed transferring shares into trust themselves.
However, for those clients who are older they might not want to wait possibly six, nine, I don't know, 12 months, before they make a decision. I mean if you look at the changes to the rules on non-doms, the big tax changes that were announced at the Budget, you know the real detail there came out on the 30th of October 2024 ahead of rule changes, with effect from 6th April 2025. So you've got pretty much six months notice there. That wouldn't be ideal here but that might be what happens, but some clients, older clients may want to take action, or at least consider their position well in advance of next next October and think about what they want to do from now on really.
|
|
Dom
|
It's interesting isn't it? In terms of the level of commentary that's coming out, particularly as regards family businesses and you look back at pre-30th of October and there was, as Julie was saying, that FOMO - the real fear of missing out that was driving deal activity and that uncertainty has now been removed as regards as we talk about entrepreneurs. So the playing field in respect of their tax position is, leaving aside IHT but certainly on CGT, is nice and clear strikes me that as for family businesses there's now a real level of concern and again anxiety caused by these changes that no doubt will lead to you having a lot of conversations with clients in terms of that early early planning, as you were saying.
|
|
Guy
|
Yeah I think I agree, you know, the position with regards to entrepreneurs is relatively straightforward and they can make decisions accordingly. The position for family businesses is more difficult. There was speculation, it was always a possibility that these rules with regards to tax relief, Inheritance Tax relief, might change. That has come to pass for those family businesses and of course we know, you know, the furore around the rules with regards to farms and how they impact the farming community.
I think the two are closely linked so it'll be interesting to see the outcome of that lobbying on behalf of the farmers. I mean, also there are family business groups like family business UK which is a lobby group that represents some of the biggest family businesses in the UK who are who are pushing for change, and it remains to be seen where the government will listen to people like Sir James Dyson, Sir James Wates, and other family business owners. But it's an the area of uncertainty and, you know, possible increased tax exposure.
|
|
Dom
|
And Julie, for your client base whether that be entrepreneurs or family business who are looking at their succession plans and/or exit, what would be your practical advice to those people looking ahead to next year planning for those events?
|
|
Julie
|
Yeah, I think it would be picking up on Guy's points really isn't it? Look at it now, you don't actually necessarily have to make a decision now, but actually assess what your options are, talk to your advisors corporate, tax, financial, just to understand your full picture and then go into with your eyes wide open. And sort of, unfortunately, slightly wait until the consultation paper comes through see if that makes many changes, but if you're unsure to speak to people now.
|
|
Guy
|
[Music] Burges Salmon's Private Wealth team is recognized as one of the best in the UK. We support entrepreneurs and family businesses on their legal needs at every stage of their personal and business journey by combining our corporate and M&A experience with our tax and trust expertise. We can advise on how the new APR and BPR rules might impact you, help your family and the business plan accordingly, and assist in shaping the future vision and legacy of your business.
[Music] Thanks again for listening to this episode of Death & Taxes - the private wealth podcast from Burges Salmon. You can listen to our previous episodes and get in touch with the team at Burges-Salmon.com, or on our LinkedIn page. This episode marks the last for season 4, during which we have discussed the implications of the Budget on landowners, non-doms, trustees, and trust companies. We hope you've enjoyed listening and please do stay tuned for season 5 coming in 2025. [Music]
|