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Are IFA entrepreneurs sold on goodwill boost?

In this year&#39s Budget statement, Chancellor Gordon Brown said: “The small firms of today are the big firms of the future.”

Brown was describing his plans for liberalising taxation for entrepreneurs – increasing capital gains tax taper relief, trimming corporation tax on small companies and simplifying the VAT regime.

But he could easily have been talking about the IFA sector, as his CGT changes and the abolition of stamp duty on goodwill could accelerate consolidation in the IFA sector.

Informed Choice managing director Nick Bamford says: “I do not think Gordon Brown had IFAs and CP121 in mind when he announced his CGT changes but inadvertently it will make consolidation more attractive to both parties.”

From next April, accelerated taper relief on capital gains for IFAs selling stakes in their companies will lead to an effective rate of 20 per cent for assets held for one year or more and 10 per cent for those held for over two years. Prior to the move, assets had to be held for more than four years before the 10 per cent rate was reached.

This change applies only to IFAs incorporated as limited companies and will not affect long-established IFAs who will be on the 10 per cent rate anyway after four years. But, coupled with the abolition of stamp duty on goodwill for those buying IFA firms, it will give IFAs the impression of a positive selling environment.

Momentum development director David James says: “This could accelerate the process of consolidation. People will be saying it is a good opportunity for IFAs to gain money and realise some value out of the business they have created.”

Many IFAs are sceptical that what Brown gave to SMEs with his cut in corporation tax he took away again with the increase in National Insurance contributions and some see his Budget as giving IFA entrepreneurs an inducement to sell up. His changes make the golden handcuffs being offered to IFAs look a little more sparkly.

Brown says he wants to encourage people to start businesses and while this year&#39s Budget has some stings for employers, it does give some short-term boosts for entrepreneurs.

Berkeley Wodehouse Associates chief executive Malcolm Streatfield says: “If you want to sell your business after a few years, then there are things that make it easier to exit. But if you want to grow your business by taking on more people, the increase in your National Insurance contributions means your costs have gone up.”

Brown boasted in his speech that he has created a CGT regime more favourable to entrepreneurs than that of the US. In 1997, all transactions were subject to a 40 per cent rate and Brown claims that 75 per cent of taxpayers with business assets will now pay the 10 per cent rate.

The end of this tax year also marks the first time that asset holders will pay 10 per cent CGT since the four-year taper relief was introduced in 1997, a potentially more significant landmark than the Budget announcement. Even retiring IFAs who have owned their limited liability firms for many years will pay 10 per cent this month for the first time.

Wentworth Rose chief executive Philip Rose says: “The beginning of this month was a significant point as it is the first time IFAs can sell at 10 per cent. This will cause a flurry in the market at a time when depolarisation is causing people to look at selling anyway. If I had to name one area that has benefited from this Budget it is smaller businesses, whereas personal finance has disappeared off Brown&#39s radar.”

The abolition of stamp duty for goodwill is a change that will affect acquisitions in the IFA sector more than most. Apart from firms with a big back book of recurring income, goodwill accounts for the majority of the value of the business for many IFAs.

The removal of a proportion of the 0.5 per cent stamp duty on IFA acquisitions is not going to cause an avalanche of consolidation all on its own but will go some way to making IFAs feel at least a few hurdles to selling up have been removed.

Berry Birch and Noble group marketing director Stephen Ingledew says: “The CGT and stamp duty are not deal-breakers, they are some of the 10 per cent issues that become relevant at the end of a transaction. But making them less of an obstacle creates a feelgood factor over whether it is a good time to sell.”

Many IFAs say they are finding that discussions with providers on buying stakes in distribution have slowed down over the past few weeks as everyone waits for the next smoke signals from the FSA over the future of CP121 and polarisation.

Providers and bigger IFAs looking to take stakes in smaller firms have been examining ways of making sure that golden handcuffs are secure enough to avoid a repeat of the disastrous acquisition of estate agents in the 1980s.

Whatever IFAs may think of what Brown&#39s Budget has done for the economy, most agree he has created an environment where people setting up and selling businesses are rewarded for their enterprise.

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