RESOURCE CENTRE

The tax benefits of private company investing depend on your personal circumstances and on compliance with the relevant rules, all of which could change, removing benefits that were expected.

What is Investors Relief?

Investors' Relief is a UK tax relief that was introduced in 2016 to provide an additional tax incentive for individuals who invest in unlisted trading companies. The relief is designed to encourage investment in early-stage and growing companies and to support economic growth. Investors’ Relief allows eligible individuals to claim a reduced 18% rate of capital gains tax (this rate applying on disposals made from 6 April 2026) on disposals of shares in unlisted trading companies subscribed by individuals. To be eligible for Investors' Relief, the shares must be newly issued, unlisted and held for a minimum of three years. In addition, the company must be a trading company and must not be listed on a recognized stock exchange at the time of the investment. Investors' Relief is designed to complement the existing Enterprise Investment Scheme (EIS), and together they provide a range of tax incentives for individuals who invest in small and growing companies in the UK. Qualifying gains for Investors’ Relief are subject to a lifetime cap of £1 million per investor.

What is Business Relief?

Business Relief (BR) is a UK tax relief that is designed to exempt certain types of business assets from Inheritance Tax (IHT). BR is intended to help ensure that wealth can be passed down from one generation to the next without being subject to a significant tax burden. Among other things, BR applies to shares in unlisted companies and provides relief on the value of the shares held by an individual at the time of their death. To qualify for BR, the shares must have been owned by the individual for a minimum of two years and the company must be wholly or mainly involved in trading as opposed to investment. In addition, there are various restrictions and conditions that must be met. From 6 April 2026, the first £1m of qualifying assets are completely exempt from inheritance tax, whilst any qualifying assets over £1m are 50% exempt, effectively resulting in a reduced 20% rate of inheritance tax.

What is Inheritance Tax?

Inheritance Tax (IHT) is a tax levied in the UK on the value of an individual's estate (i.e. their property, money, and possessions) when they die. IHT is calculated based on the value of the estate above a certain threshold, known as the "nil rate band", which is currently £325,000. The rate of IHT depends on the size of the estate and the relationship between the deceased and the beneficiaries. For estates above the nil rate band, IHT is charged at a rate of 40%. However, there are a number of exemptions and reliefs available to reduce the amount of IHT payable, including Business Relief, Agricultural Relief, and Woodland Relief. In addition, gifts made by the deceased during their lifetime may also be subject to IHT if they exceed the annual gift allowance of £3,000, or if they are considered "potentially exempt transfers".

What is management due diligence?

Management due diligence is a process of evaluating the management team and its capabilities as part of a larger due diligence process, usually in the context of a business transaction such as a merger, acquisition, or private equity investment. It involves a comprehensive review of the management team's experience, track record, leadership style, organizational structure, and plans for the future of the business. The objective of management due diligence is to assess the quality and effectiveness of the management team, and to identify any risks or challenges that may impact the success of the transaction or the future performance of the business.

What is commercial due diligence?

Commercial due diligence is a thorough analysis of a company's market position, competition, customers, and revenue streams to evaluate the potential commercial viability of an investment opportunity. It is a crucial aspect of the due diligence process, often performed as part of a merger, acquisition, or private equity investment, to identify potential risks and opportunities associated with the target company's business operations and performance. Commercial due diligence includes reviewing market trends, customer demand, product offerings, pricing strategies, distribution channels, and key competitors, among other factors. The goal of commercial due diligence is to provide a comprehensive understanding of the target company's commercial environment and help assess the potential for growth and profitability.

What is tax due diligence?

Tax due diligence is a comprehensive review of a company's tax history, tax compliance, and tax planning strategies, performed as part of a merger, acquisition, or private equity investment. The objective of tax due diligence is to identify any potential tax risks or liabilities that may impact the financial performance or value of the target company. This may include reviewing tax returns, tax assessments, and tax rulings, as well as assessing the tax implications of any proposed transactions or changes to the company's business operations. The outcome of tax due diligence is often used to negotiate the terms of the transaction, including tax warranties and indemnities, and to plan for any necessary tax restructuring or tax optimization strategies. The goal of tax due diligence is to help ensure that the target company is tax compliant and that any potential tax risks are managed effectively.

What is legal due diligence?

Legal due diligence is a comprehensive review of a company's legal and regulatory compliance, performed as part of a merger, acquisition, or private equity investment. The objective of legal due diligence is to identify any potential legal risks or liabilities that may impact the financial performance or value of the target company. This may include reviewing contracts, licenses, permits, and legal agreements, as well as assessing compliance with relevant laws and regulations, such as labor laws, health and safety regulations, and environmental protection laws. Legal due diligence may also involve evaluating the status of any ongoing legal proceedings or potential legal disputes that may impact the target company. The outcome of legal due diligence is often used to negotiate the terms of the transaction, including legal warranties and indemnities, and to plan for any necessary legal restructuring or compliance measures. The goal of legal due diligence is to help ensure that the target company is legally compliant and that any potential legal risks are managed effectively.

What is technical due diligence?

Technical due diligence is a comprehensive review of a company's technical operations, systems, and infrastructure, performed as part of a merger, acquisition, or private equity investment. The objective of technical due diligence is to assess the technical capabilities, efficiency, and scalability of the target company, and to identify any potential technical risks or challenges that may impact its financial performance or growth prospects. This may include reviewing the company's technology platforms, systems architecture, software development processes, data management practices, and cybersecurity measures.

Technical due diligence may also involve evaluating the company's technology roadmap, the technical expertise of its management and staff, and the availability of relevant technical skills and resources in the market. The outcome of technical due diligence is often used to negotiate the terms of the transaction, to plan for any necessary technical integration or optimization, and to assess the target company's potential for future growth and innovation. The goal of technical due diligence is to help ensure that the target company has the technical capabilities and resources to succeed in the long-term.

Trade sale/Strategic Acquisition

A trade sale/strategic acquisition is where the privately held company is sold to another suitable company that may operate in the same, or similar space. The buyer will usually gain a strategic advantage in acquiring this business as there is usually high synergy potential. For this reason, the buyer will often pay a premium price (higher multiple) to acquire it. This is one of the most popular exit routes for private equity funds as it leads to a clean break, allowing all management and institutional investors to be entirely cashed out. Trade sales also generally lead to a higher return due to the enhanced strategic value of the acquisition.

Secondary investor/secondary buy-out/secondary sale

A secondary investor/secondary buy-out or secondary sale is where the private investors sell their stake in the business to another private equity firm. This can happen for many reasons, for example, the business may require more money which is not in the capacity of the current equity fund. Or, the business may have reached a stage that the existing private equity investors wanted it to reach and other equity investors want to continue the growth of the business. This usually involves realising some equity at the time of exit but retaining a stake in the future growth. Deferred income is therefore relatively common in a secondary buy-out.

IPO

Exit by Initial Public Offering (IPO) floats the company onto a stock exchange e.g. AIM/LSE. Management and investors can sell their own shares as a part of the IPO. You may sell your share immediately, or sell the shares allotted to you after the company gets listed and the shares start trading on the exchange. An exit via IPO is entirely dependent on market liquidity. If the quoted market is ‘shut ’an IPO cannot be undertaken - no matter how well positioned the investee company is.

What is a management buyout?

A management buyout (MBO) is a type of corporate transaction in which the existing management team of a company acquires a significant ownership stake in the business, usually with the assistance of private equity or other financial investors. An MBO typically occurs when the current owners of a company, such as the shareholders or the private equity firm, are looking to sell their stake and the management team sees an opportunity to acquire the business.

The management team, in conjunction with financial investors, will typically secure financing for the MBO through a combination of debt and equity, with the management team taking on a significant portion of the equity risk. The goal of an MBO is to provide a new ownership structure for the company, with the management team having a strong incentive to grow and improve the business, and to provide a return on investment for the financial investors.

MBOs are a common exit strategy for private equity firms, as they provide an opportunity for the management team to take on a more significant ownership role in the business, and to realize the value of their expertise and experience. In addition, MBOs can provide a more flexible and tax-efficient exit for the private equity firm, compared to a trade sale or an IPO.

However, MBOs can also be complex and risky transactions, as they require the management team to take on significant debt and to assume a large portion of the financial risk associated with the business. As a result, careful planning and execution are crucial to the success of an MBO.

What is development/growth capital?

Development or growth capital investment is a type of private equity investment made in companies that are looking to expand and grow their business, but that are not yet ready for an initial public offering (IPO) or a trade sale. Development capital is usually provided by private equity firms or venture capital firms, and is used to finance the growth and expansion of the business, including investments in research and development, marketing, sales, and other key areas.

The goal of development capital investment is to support the growth and expansion of the business, and to help it reach its full potential. In return for their investment, the private equity or venture capital firm will typically receive an ownership stake in the company, and may have a seat on the board of directors or other governance rights.

Development capital is typically a higher-risk, higher-return investment than more traditional forms of private equity, as the companies receiving the investment are typically earlier in their development and may face significant growth and operational challenges. However, for companies that are able to successfully execute on their growth plans, development capital can be a key driver of success and can help position the business for a future trade sale or IPO.

In summary, development capital investment is a type of private equity investment that provides funding and support to growing companies to help them reach their full potential. It is typically made by private equity firms or venture capital firms, and provides a higher-risk, higher-return investment opportunity for investors.

What is equity release?

In an equity release private equity deal, the private equity firm typically provides capital to the investee company to support its growth and expansion, including investments in marketing, sales, technology, and product development. In return for its investment, the private equity firm will receive an ownership stake in the equity release company, and may have a seat on the board of directors or other governance rights.

The success of an equity release private equity deal depends on the ability of the equity release company to grow and scale its business, and to provide a return on investment for the private equity firm. It is important for private equity firms to carefully consider the market dynamics and regulatory environment, as well as the competitive landscape and growth potential, before entering into an equity release private equity deal.

What is buy and build?

A buy and build investment strategy is a private equity investment approach in which a private equity firm acquires a series of complementary companies in a specific industry or market, with the goal of creating a larger and more valuable company.

The strategy involves acquiring a target company and then using that company as a platform to make additional acquisitions of other companies in the same or related industries. This allows the private equity firm to achieve economies of scale and scope, increase market share, and drive synergies across the portfolio of companies. The ultimate goal of a buy and build investment strategy is to create a larger and more valuable company that can be sold for a higher price, generating a higher return on investment for the private equity firm.

Buy and build investment strategies are often used in industries where there are many small companies, but few large players. By acquiring a series of smaller companies, the private equity firm can create a dominant player in the industry and increase its bargaining power with suppliers and customers.

To execute a successful buy and build investment strategy, private equity firms must have a clear vision for the portfolio of companies they want to create, a deep understanding of the target industry, and the ability to execute on multiple acquisitions in a short period of time. Additionally, it is important for private equity firms to have a strong integration plan in place to ensure that the acquired companies are integrated effectively and that the synergies are realized.

What does an M&A deal process include?

A typical 10-step M&A deal process includes:

• • • Develop an acquisition strategy – Developing a good acquisition strategy revolves around the acquirer having a clear idea of what they expect to gain from making the acquisition – what their business purpose is for acquiring the target company (e.g., expand product lines or gain access to new markets)
    • Set the M&A search criteria – Determining the key criteria for identifying potential target companies (e.g., profit margins, geographic location, or customer base.
    • Search for potential acquisition targets – The acquirer uses their identified search criteria to look for and then evaluate potential target companies
    • Begin acquisition planning – The acquirer makes contact with one or more companies that meet its search criteria and appear to offer good value; the purpose of initial conversations is to get more information and to see how amenable to a merger or acquisition the target company is
    • Perform valuation analysis – Assuming initial contact and conversations go well, the acquirer asks the target company to provide substantial information (current financials, etc.) that will enable the acquirer to further evaluate the target, both as a business on its own and as a suitable acquisition target
    • Negotiations – After producing several valuation models of the target company, the acquirer should have sufficient information to enable it to construct a reasonable offer; Once the initial offer has been presented, the two companies can negotiate terms in more detail
    • M&A due diligence – Due diligence is an exhaustive process that begins when the offer has been accepted; due diligence aims to confirm or correct the acquirer’s assessment of the value of the target company by conducting a detailed examination and analysis of every aspect of the target company’s operations – its financial metrics, assets and liabilities, customers, human resources, etc.
    • Purchase and sale contract – Assuming due diligence is completed with no major problems or concerns arising, the next step forward is executing a final contract for sale; the parties make a final decision on the type of purchase agreement, whether it is to be an asset purchase or share purchase
    • Financing strategy for the acquisition – The acquirer will, of course, have explored financing options for the deal earlier, but the details of financing typically come together after the purchase and sale agreement has been signed
    • Closing and integration of the acquisition – The acquisition deal closes, and management teams of the target and acquirer work together on the process of merging the two firms

There are several different types of mergers and acquisitions, including vertical, horizontal, congeneric, market-extension, product-extension, and conglomerate. The benefits of each are varied and depending on your strategy could include: building economies of scale, increasing market share, decreasing competition, boosting efficiencies, expanding product lines, or diversifying offerings. There are also, however, negative connotations associated with each type, which should also be carefully considered before merging companies.

The most common difference between a merger and an acquisition relates to the size of the companies involved. When one company is much larger than the other, it is likely that it will integrate the smaller one into the larger one in an acquisition. The smaller company may still retain its legal name and structure but is now owned by the parent company. In other instances, the smaller company ceases to exist completely. When the companies are of a similar size, they may come together to form a new entity which is when a merger occurs.