Valuation squeeze...

After a lot of headlines and guesswork in the media we finally got answers on the Labour party's plan yesterday, and it certainly brought some sweeping changes!

It was clear from comments made in the lead up to the Budget that tax rates were going to increase, and many articles have already been published summarising the various changes. But from a transactional perspective there are three key areas that are likely to be hot topics in the coming months:

1. Increased Employers NIC contributions through a 1.2% increase and significant reduction of the secondary threshold (although this may be offset by changes to the Employers Allowance);
2. Increases to minimum wage and National Living Wage; and
3. Changes to CGT with immediate effect and BADR rate in April 25 and April 26.

Impact on shareholders

The negative impact for a lot of business owners will inevitably be an increase in cost from the first two points above. In turn this will reduce EBITDA – the key metric used in many valuations.

This will be particularly relevant for businesses with large workforces where average salary is low and/or near minimum wage, such as manufacturing and construction. Many of these sectors were already struggling for investment and funding after 4 years of wage inflation and uncertainty have reduced appetite from financial institutions.

Conversely, business with less direct employees, higher average salaries, and/or margins such as those in the TMT or franchising sectors are likely to be less proportionally impacted.

Alongside this we have seen an increase in the tax rates for owners of businesses on the value they have built in their shares. We have seen an immediate rise in the main CGT rate from 20% to 24%, and a 2 year roadmap for Business Asset Disposal Rate to increase from 10% to 18% by April 2026.

Coupled with the changes to Inheritance Tax and Business Property Relief, the benefits to continue building value and maintaining ownership for future generations might not look as appealing as they once did.

What are my options?

It’s not all doom and gloom! For a start the changes to CGT have been a lot softer than many in the media expected, and whilst tax rates have increased they still offer a meaningful reduction compared to receipts via dividends or PAYE.

In addition, the increases to BADR are being spread over multiple years, providing an opportunity to business owners who may have been considering their options, to make changes ahead of April 2025 and April 2026.

Following a tumultuous 4 years and uncertain outlook both politically and economically, we at least have some certainty on the political environment for the coming years. Many business owners will now be looking at what this means for them, both as Directors of businesses, and as individuals. Inevitably, many will be making fundamental decisions on whether to continue, or whether the stars are now aligned to crystalise their value and plan a route to exit via either a sale or MBO.

It goes without saying that getting the right advice is key to making such decisions, and this is an area that we at Meridian are proud to say we have a huge amount of experience in, and would value any opportunity to discuss.

In the meantime, what’s your view on the changes? Will they drive different behaviours moving forwards or do you view it as not being significant in your decision making?

Article written by: Philip Mettam - Director