Article / 4 Dec 2025

Budget 2025: Impact on M&A and PE markets

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Gateley Legal

Having a stable economic environment is essential in both driving positive investor sentiment and increasing confidence in the credibility and deliverability of business forecasts.

Thankfully, therefore, at least as far as M&A and PE markets are concerned, it is safe to say there was a sense of relief that the 2025 Budget delivered a series of incremental, ‘non-seismic’ changes, rather than drastic, sweeping reforms.

In the 2024 Budget, the Chancellor surprised the market with an unexpected 2% rise in employers’ National Insurance contributions, coupled with rises in CGT rates. Both the scale of the tax rise and its unexpected appearance did little to foster positive investor sentiment against an already far from certain macro-economic backdrop.

The run up to this year’s Budget featured an abnormal series of “socialised” ideas, presumably to get a steer as to how well certain changes might land. In the end, the changes were more benign than had been trailed. A key question is whether the relatively low levels of change (for businesses), at least in the near term, will foster a more positive sentiment among investors to help unlock a sense of inertia in the transaction pipeline.

Early reactions from the financial markets were pretty positive. Gilt rates are falling, for example, with costs of borrowing generally expected to follow suit, and it looks like the Budget announcements won’t derail the downward trend on interest rates. On one analysis, these effects (or, rather “non-effects”) of the Budget speak more to the likely impact on the M&A and PE markets than any particular announcement.

Nonetheless, what difference will the actual announcements likely make?

  • One competitor to PE for acquisitions is potentially less attractive, which may mean more opportunities to seek trade and PE buyers – to date, sales of controlling shareholdings in trading companies to employee ownership trusts (“EOTs”) have meant no Capital Gains Tax (CGT) on the sale proceeds if appropriately structured. This meant net proceeds of a sale to trade or a PE were potentially less attractive, even if the EOT paid less. The Chancellor has made this relief less generous with immediate effect. Now, only 50% of any gain will qualify for favourable treatment and the remaining 50% being taxed under standard CGT rules. EOTs will lose some of the price differential advantage. That said, the net CGT rate is still likely to be 12%, so EOT’s are not ‘gone’, just a bit less attractive. Although, additional restrictions surrounding sales to EOTs, mean a sale to trade or a PE is likely to have other benefits too. So, a ‘headline’, maybe, but not one of huge consequence in the PE landscape in our view.
  • Rolling over the tax might not be quite so easy – certainly with PE buy-outs, it is important that many sellers can roll over their investments without crystallising dry CGT tax charges. Often tax clearances are sought to gain comfort that HMRC won’t later deny roll over relief where it perceives a tax avoidance motive. In two changes announced in the Budget, it looks like HMRC is increasing its scope for identifying such an avoidance motive. This is intended to give HMRC the ability to deny the roll-over on a broader set of transactions. The other change now pulls smaller shareholders (who were outside these anti-avoidance provisions) into the potential net too. A “standard” roll over ought not to be affected, and this ought not to affect the M&A market! However, it is likely to mean that more transactions will only take place conditional on clearance being granted.
  • Rates of CGT aren’t getting worse – key here is that the pending increase in CGT where business asset disposal relief is available is already baked into people’s thinking. This is not a ‘2025” change, but a hang-over from the 2024 Budget. Any further increase in rates would have made sales less attractive. It is already hard enough to get sales over the line, so at least the decision not to make the CGT burden even higher won’t exacerbate an existing problem in the M&A market. We would note also that, given the £1M lifetime cap for business asset disposal relief, the swing is capped at £40,000, so any suppressing impact on deal appetite is likely to be minimal.
  • Management Incentive Plans and post-deal employee incentives may be easier to structure – There is good news for tax-favourable Enterprise Management Incentive (EMI) option schemes. Currently a company (or group) cannot grant EMI options if there are more than 250 employees or if gross assets exceed £30m. The Chancellor has announced that these limits would be relaxed and that they would be changed to 500 employees and £120m respectively from April 2026. Further, the share option limit will increase to £6m from April 2026 too. These relaxations will open the door for more opportunities to use these kinds of incentives, particularly in conjunction with mid-market PE transactions.
  • Will increases in investor reliefs extend exit timetables? – there is some good news for investors in Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) too. These arrangements deliver income and capital gains tax breaks for investors, subject to a minimum holding period requirement. The arrangements are to be amended to capture more ‘financially mature’ companies. In particular, investment thresholds for investee companies are such that, from April 2026 the annual company investment limit will increase from £5m to £10m, the lifetime limit increases from £12m to £24m and gross assets tests increase from £15m to £30m. While good news on the face of it for certain investors, this is countered by the reduction in income tax relief on amounts invested in VCTs from 30% to 20% is likely to suppress some appetite and increases in holding periods may delay companies coming to market. So, again, both good and bad news here and we would not expect the impact of this to be particularly significant in the PE mid-market.

Our overall perspective is that none of the 2025 Budget announcements are likely to result in either a boost or a deterioration in M&A or PE activity. Some would say this is an opportunity missed. However, given some of the ideas trailed before the Budget, others will say that we ended up in a good place.

However, the outcome is a more stable and less uncertain environment than may have been the case (and certainly then was feared amid the pre-Budget chatter).

That being the case, our view is that, perhaps inadvertently, ‘less is more’ and the prevailing sentiment here at Gateley and amongst many of our clients is that, absent any new macro-impacts or significant policy changes, the relative calm should stimulate an increase in confidence.

Therefore, we expect an increase in deal appetite, especially given that the Chancellor’s decision to “spend now, pay later” means that, without significant economic growth to fund it, the “later” may be even worse than currently predicted – so, now is the time to get busier!

Get in touch

If you have any queries on any of the points raised in this insight, please get in touch with a member of our corporate or tax team.