Upsurge in M&A will not match the deal frenzy of 2008, says Jelf chief executive Alway
The coalition government’s plans to increase the rate of capital gains tax (CGT) will generate a rush of consolidation in the run-up to next month’s emergency Budget, leading brokers have predicted.
Under the agreement between the Conservatives and the Liberal Democrats, which provides the ground rules for the new government’s policies, CGT will be increased to bring it more closely into line with the income tax rate – a key Lib Dem manifesto pledge. The agreement says the higher rate will apply to “non-business” capital gains with “generous” exemptions for “entrepreneurial business activities”.
While the top rate of income tax is 50% on earnings above £150,000, the levy on capital gains is 10% for capital gains of less than £2m and 18% for those above that level.
The increase is designed to help pay for the coalition’s pledge to substantially increase personal allowances on income tax.
PricewaterhouseCoopers tax partner Alex Henderson said that under the rules governing CGT before 2008, business gains were counted as active investments in trading companies, while non-business assets included shares and property.
But former chief executive of Brokerbility, Stuart Randall, said that the uncertainty surrounding the coalition’s announcement was likely to provoke a spike in merger and acquisition activity before 22 June, the date of the emergency Budget.
He said: “It’s going to fuel a rush to consolidate as people try to get in before it [the new rate] comes in.”
Randall added that the entrepreneurs’ relief – the lower rate 10% rate of CGT for gains below £2m – even if it is retained, would “stand out” as low once the higher general rate had been introduced.
Group chief executive of Jelf, Alex Alway, agreed with Randall. “If people were considering their position, then this will crystallise their thoughts,” he said.
But he predicted that the upsurge in deals would not be as great as 2008, when the headline rate of CGT was last raised.
He said that the last CGT increase had flushed out a lot of small-to-medium brokers that were ready to sell; many firms would not have reached the same position now.
Henderson said the CGT increase might deliver broader benefits for the insurance industry by increasing the attractiveness of insurers’ bonds, which are treated as income for tax purposes, vis-à-vis investments like unit trusts, which are taxed as capital gains.