Has the progress of consolidation been affected by the Budget?

Many column inches have already been written about the impact of the recent Budget in relation to the impact on consolidation in the financial intermediary sector.

As in other areas, the consensus to date, is that ‘it could have been worse’.

What are the proposed changes and what real difference might the make?

First the tax changes:

• From April 6 2025 business asset disposal relief tax rate will increase from 10 per cent to 14 per cent, and then from April 6 2026 the rate goes up to 18 per cent.
• Effective from October 30 2024, the lower rate of capital gains tax (for basic rate taxpayers) rose to 18 per cent from 10 per cent, and the higher rate of CGT (for higher rate taxpayers) went up to 24 per cent from 20 per cent.

Therefore, taken together, the proposed changes are not trivial.

The changes will not deter those minded to sell their businesses, and if completion of a transaction can take place before the end of the current tax year on April 5 2025, there is a clear tax benefit in doing so.

That said, ‘the tax tail should not wag the deal dog’, so any transaction should be considered based on the aspirations, needs, objectives and wishes of owners of financial planning firms, and they should not be swayed by tax considerations alone.

So what might the impact of the changes be on the owners of financial planning businesses looking to sell?

We see no slowdown in transactions. Rather, consolidation will continue albeit without the froth that there was up to the end of 2022.

Both buyers and sellers are being more considered, and for well-run firms there will be a continuing strong demand from buyers generally and private equity-backed ones in particular.

However, for firms that cannot demonstrate that their advice reviews have and are being completed, they will continue to find acquirers lukewarm, but this not because of the Budget.

What might the impact of the Budget be on acquirers?

For example, will the UK, in the light of the Budget, be considered a less attractive place to invest by overseas-based PE firms, especially those based in the US?

In our view, probably not, because of the very attractive arbitrage that looks likely to continue between the multiples achievable in the UK versus the US.

But will the proposed changes in carried interest, an increase on the tax rate from 28 per cent to 32 per cent from April 6 2025, and then taking interest as income not capital gains from April 6 2026, make a difference to the mindsets of the private equity sector?

Probably not. The sector will in all likelihood live with them, but the proposal to apply income tax to carried interest received by fund managers now living abroad, for funds they managed while working in the UK, could lead to some people from abroad no longer wanting to come to the UK.

And will the Budget proposals negatively impact on the underlying value of financial intermediary firms, for example, the proposed change to pension death benefits?

Might that encourage more annuitisation, and what impact could that have on future income streams?

Probably not enough to make a discernible difference.

‘Act in haste, repent at leisure’, continues to be an expression to keep in mind

So, in conclusion, in the short term, we see a number of financial planning firm owners seeking to complete their sales ahead of the April 6 2025.

And for those starting now, it is likely that only asset sales will have any real prospect of meeting this timescale because share sales require change in control authorisation from the Financial Conduct Authority.

It is again worth repeating that tax should not be the primary consideration.

Personal chemistry, ethos, and culture, along with the treatment of clients and colleagues are all more likely to be primary considerations for business owners.

‘Act in haste, repent at leisure’, continues to be an expression to keep in mind.

It was first used by William Congreve in 1692 in the context of marriage, but it has stood the test of time in other contexts, one of which is business transactions which should always be entered into with care, diligence and thought.