New 50p tax rate ‘ could trigger a wave of MBOs ‘

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The new 50 per cent income tax rate for high earners could encourage many owner managers to sell up and trigger a round of management buy-outs according to Clearwater Corporate Finance.

The new top rate, which comes into force next April and affects those earning £150,000 or more, is the level of highest income tax since the 1980s. It is part of a triple whammy for high earners who will also have tax relief on their pension contributions reduced and their personal allowances gradually withdrawn.

Clearwater partner Phil Burns says: “Many owner managers will become disillusioned once the tax increase starts to bite. Those who were considering an exit in the near future may choose to sell there and then rather than await a full market recovery. Given the high levels of national debt and the government’s need to raise more money from taxes, some may also worry that capital gains tax may rise and if they wait too long to sell, they may end up paying more tax on the proceeds.”

He believes many owner managers in this situation may not want to conduct a traditional formal sales process and have their business in the ‘shop window’ at a time when most businesses on the market are there out of distress rather than success.

Burns adds: “Many more owners are looking for more subtle approaches to an exit and we are carrying out softer marketing exercises or much narrower covert auctions. This also might play into the hands of management teams and private equity houses making more discrete approaches to an owner.

“Whilst the pound has rallied slightly the general weak position of sterling continues to encourage overseas buyers particularly from Europe and the US. The good news for owners is generally the more strategic the acquisition, the higher the exit price. Our partners around the globe continue to introduce a constant flow of buyers seeking out acquisition targets in the UK.”

Phil Burns concludes: “The new tax rate and the threat of higher capital taxes will trigger a round of owner manager sales and will be one of the key drivers of deals in 2010.”