My heart sank when I read that the prospective new leaders of the Labour Party are all mooting changes to Capital Gains Tax including, most radically, the equalisation of CGT with income tax rates. As a Corporate Finance (not tax!) adviser, uncertainty around the CGT regime is a source of periodic upheaval and client anxiety.
Prior to 1998 CGT was, in broad terms, paid at an individual’s income tax rate, with indexation and retirement relief (in many cases materially) softening the impact. In 1998, however, the new Labour Government introduced Taper Relief, including Business AssetTaper Relief (BATR), which was designed to incentivise the holding of assets and penalise “flipping”.
For business assets, BATR (in simple terms) reduced the percentage of the gain that was taxable, with the maximum relief reached after two years of qualifying ownership. At that point, only 25% of the gain was chargeable, so a higher‑rate taxpayer on 40% would pay an effective rate of 10%. For non‑business assets, taper relief was slower and the maximum 40% reduction applied only after ten years. The calculation for assets acquired before April 1998 also involved indexation relief on the base cost, which compensated for the effect of inflation up to that date.
This arrangement was complex and drove a great deal of tax planning in the attempt to arrive at the lowest level of gain. For example, the use of loan notes to defer the crystallisation of a gain could secure an additional year or two of relief and was a standard tax planning device.
This complexity ultimately led the government to abolish Taper Relief, which was not only hard for taxpayers to understand, but also hard for HMRC to administer. The arrangements also incentivised the holding of assets for as long as possible, even when this was economically inefficient, and saw investors delaying business sales (and therefore tax realisations) to reduce the amounts payable.
In 2008 the Government introduced a flat rate of Capital Gains Tax for most forms of asset at 18%. The goal was to make the tax more straightforward and transparent. However, for those shareholders who had held their business shares for a long time, 18% was a considerably higher effective rate than they had been used to paying. Take for example the sale of the shares in a business by a long‑term shareholder generating a gain of £5m. Under BATR the tax on the gain (unindexed) would have been £500,000, whereas the new Capital Gains Tax rate would lead to tax payable on the same gain of £900,000.
The shareholding community were understandably vocally unhappy with this outcome and so the Government of the time introduced Entrepreneurs’ Relief (ER), which allowed shareholders who had held their shares for at least 1 year (later extended to two years), were employees or officers of the business and owned at least 5% of the company (including voting rights) to tax their gains at only 10% on a lifetime limit that was steadily increased to reach £10m by 2011. In the above example and assuming the conditions were met and the lifetime limit not already used, the tax due on the £5m gain would be back at the £500,000 payable under BATR.
The Entrepreneurs’ Relief regime lasted for twelve years, during which time most business vendors were comfortable with the generous allowance and there was a material reduction in the level of tax planning and structuring that had previously been rife. It was in place long enough to encourage the establishment of incentive schemes designed to bring management teams into the ER regime to take advantage of the gap between the ER rate of 10% and the standard CGT rate (which for higher‑rate taxpayers on most non‑residential assets later rose to 20%), let alone the highest income tax rate which peaked between 2010 and 2013 at 50%, reducing thereafter to the current 45%.
In 2020 the level of gain that benefited from the 10% rate was reduced hugely from £10m to £1m and the name of the relief was changed from Entrepreneurs’ Relief to Business Asset Disposal Relief (BADR). Despite the reduced generosity of the allowance attributed to business vendors, the general (higher) CGT rate of 20% was still materially lower than Income Tax rates and the advantage of creating a capital disposal therefore remained very tangible. The focus of tax advisers shifted to ensuring that capital treatment was assured on business disposals, and most vendors accepted the level of CGT due without undertaking planning to manage it. On our example £5m gain, the CGT for a qualifying vendor would be £900,000 (10% on the first £1m and 20% on the remaining £4m).
In 2024, changes were announced to increase the general higher CGT rate from 20% to 24% and to increase the rate applicable to the first £1m of qualifying gains for business vendors from 10% to 14% from April 2025 and then to 18% from April 2026. On the same illustrative £5m gain, a qualifying business vendor would, under those rates, now pay £1.14m of tax (18% on £1m and 24% on £4m), the highest tax burden on such a transaction since pre 1998.
If a future government were to enact an equalisation of CGT and Income Tax then, assuming that a business owner was paying Income Tax at the additional rate, the tax payable (without any new allowances or reliefs being introduced for entrepreneurs) on the £5m gain would be £2.25m, almost twice the amount due under the post‑2024 regime and four and a half times the amount due under the Entrepreneurs’ Relief regime until 2020.
So, what would be the potential impact of such a change?
It has been a long time since we had an economy which didn’t in some way reward business ownership with lower effective tax rates on capital gains. During that time the market economy in the UK has evolved to take advantage of the benefits of value creation and capital growth.
In the short term, I have no doubt that the impact of such a change would be to halt M&A in the UK in its tracks to give time to think and in the hope that a subsequent change of regime would reverse the policy to continue to reward risk‑taking shareholders. For most business vendors there is no imperative about the timing of a business sale and previous threatened changes have demonstrably resulted in accelerated selling followed by a pause.
In any case entrepreneurs and their investors would no longer need to focus on capital growth in the way that they historically have. If a capital event were to be taxed in precisely the same way as income, then business owners might as well just draw all the cash in their business as they go along. Without the capital tax advantage of creating business value there is no benefit in deferred gratification and the reward for investing now to build future value is a riskier equation for sure.
The potential for incentivising management to remain with the business through a transaction would be inherently limited compared to the equity‑based incentive schemes available today which would likely damage earlier‑stage/high‑growth‑potential businesses that would have to pay competitive salaries without the capacity for capital value creation.
Many other countries have capital gains tax rates that are similar or equal to income tax rates and investment and growth are demonstrably achievable in these regimes. However, they all have considerably lower income tax rates than the UK and in some (Germany and the Nordics) there is a much greater tradition of long‑term family or employee share ownership. It is also usually the case that the prices paid for businesses in these jurisdictions are less aggressive than in the UK or US.
If the equalisation of rates were to be accompanied by strong support for entrepreneurs, effective arrangements and incentives to support internal share markets, an overall reduced rate of income tax and a plan to replace equity‑based incentives with income‑based ones that didn’t prejudice the current generation of management teams, then conceivably the strategy could result eventually in a more stable economy where the culture was about retention and growth and not about valuable exits. It is undeniably the case, for example, that Private Equity still thrives in Germany, France and the Nordics where alignment of tax rates is much closer than in the UK.
I see little prospect of this headline policy being accompanied by the kind of support and planning it would require, however. A more likely scenario is paralysis in M&A, a return to aggressive tax planning including offshoring, and a shift to less entrepreneurial investment in UK businesses as strategies turn to cash extraction. I am not sure that it would deter the establishment of new businesses, which is rarely a tax‑driven decision, but it would certainly make it harder for new businesses to attract high‑quality senior staff without the carrot of future capital gains.
Whatever one’s politics, seismic tax changes are destabilising and potentially have unintended consequences. Observing how the tax reliefs available to entrepreneurs have already more than halved since 2020, it is guesswork where their tolerance for being taxed ends.
My heart sank when I read that the prospective new leaders of the Labour Party are all mooting changes to Capital Gains Tax including, most radically, the equalisation of CGT with income tax rates. As a Corporate Finance (not tax!) adviser, uncertainty around the CGT regime is a source of periodic upheaval and client anxiety.
Prior to 1998 CGT was, in broad terms, paid at an individual’s income tax rate, with indexation and retirement relief (in many cases materially) softening the impact. In 1998, however, the new Labour Government introduced Taper Relief, including Business AssetTaper Relief (BATR), which was designed to incentivise the holding of assets and penalise “flipping”.
For business assets, BATR (in simple terms) reduced the percentage of the gain that was taxable, with the maximum relief reached after two years of qualifying ownership. At that point, only 25% of the gain was chargeable, so a higher‑rate taxpayer on 40% would pay an effective rate of 10%. For non‑business assets, taper relief was slower and the maximum 40% reduction applied only after ten years. The calculation for assets acquired before April 1998 also involved indexation relief on the base cost, which compensated for the effect of inflation up to that date.
This arrangement was complex and drove a great deal of tax planning in the attempt to arrive at the lowest level of gain. For example, the use of loan notes to defer the crystallisation of a gain could secure an additional year or two of relief and was a standard tax planning device.
This complexity ultimately led the government to abolish Taper Relief, which was not only hard for taxpayers to understand, but also hard for HMRC to administer. The arrangements also incentivised the holding of assets for as long as possible, even when this was economically inefficient, and saw investors delaying business sales (and therefore tax realisations) to reduce the amounts payable.
In 2008 the Government introduced a flat rate of Capital Gains Tax for most forms of asset at 18%. The goal was to make the tax more straightforward and transparent. However, for those shareholders who had held their business shares for a long time, 18% was a considerably higher effective rate than they had been used to paying. Take for example the sale of the shares in a business by a long‑term shareholder generating a gain of £5m. Under BATR the tax on the gain (unindexed) would have been £500,000, whereas the new Capital Gains Tax rate would lead to tax payable on the same gain of £900,000.
The shareholding community were understandably vocally unhappy with this outcome and so the Government of the time introduced Entrepreneurs’ Relief (ER), which allowed shareholders who had held their shares for at least 1 year (later extended to two years), were employees or officers of the business and owned at least 5% of the company (including voting rights) to tax their gains at only 10% on a lifetime limit that was steadily increased to reach £10m by 2011. In the above example and assuming the conditions were met and the lifetime limit not already used, the tax due on the £5m gain would be back at the £500,000 payable under BATR.
The Entrepreneurs’ Relief regime lasted for twelve years, during which time most business vendors were comfortable with the generous allowance and there was a material reduction in the level of tax planning and structuring that had previously been rife. It was in place long enough to encourage the establishment of incentive schemes designed to bring management teams into the ER regime to take advantage of the gap between the ER rate of 10% and the standard CGT rate (which for higher‑rate taxpayers on most non‑residential assets later rose to 20%), let alone the highest income tax rate which peaked between 2010 and 2013 at 50%, reducing thereafter to the current 45%.
In 2020 the level of gain that benefited from the 10% rate was reduced hugely from £10m to £1m and the name of the relief was changed from Entrepreneurs’ Relief to Business Asset Disposal Relief (BADR). Despite the reduced generosity of the allowance attributed to business vendors, the general (higher) CGT rate of 20% was still materially lower than Income Tax rates and the advantage of creating a capital disposal therefore remained very tangible. The focus of tax advisers shifted to ensuring that capital treatment was assured on business disposals, and most vendors accepted the level of CGT due without undertaking planning to manage it. On our example £5m gain, the CGT for a qualifying vendor would be £900,000 (10% on the first £1m and 20% on the remaining £4m).
In 2024, changes were announced to increase the general higher CGT rate from 20% to 24% and to increase the rate applicable to the first £1m of qualifying gains for business vendors from 10% to 14% from April 2025 and then to 18% from April 2026. On the same illustrative £5m gain, a qualifying business vendor would, under those rates, now pay £1.14m of tax (18% on £1m and 24% on £4m), the highest tax burden on such a transaction since pre 1998.
If a future government were to enact an equalisation of CGT and Income Tax then, assuming that a business owner was paying Income Tax at the additional rate, the tax payable (without any new allowances or reliefs being introduced for entrepreneurs) on the £5m gain would be £2.25m, almost twice the amount due under the post‑2024 regime and four and a half times the amount due under the Entrepreneurs’ Relief regime until 2020.
So, what would be the potential impact of such a change?
It has been a long time since we had an economy which didn’t in some way reward business ownership with lower effective tax rates on capital gains. During that time the market economy in the UK has evolved to take advantage of the benefits of value creation and capital growth.
In the short term, I have no doubt that the impact of such a change would be to halt M&A in the UK in its tracks to give time to think and in the hope that a subsequent change of regime would reverse the policy to continue to reward risk‑taking shareholders. For most business vendors there is no imperative about the timing of a business sale and previous threatened changes have demonstrably resulted in accelerated selling followed by a pause.
In any case entrepreneurs and their investors would no longer need to focus on capital growth in the way that they historically have. If a capital event were to be taxed in precisely the same way as income, then business owners might as well just draw all the cash in their business as they go along. Without the capital tax advantage of creating business value there is no benefit in deferred gratification and the reward for investing now to build future value is a riskier equation for sure.
The potential for incentivising management to remain with the business through a transaction would be inherently limited compared to the equity‑based incentive schemes available today which would likely damage earlier‑stage/high‑growth‑potential businesses that would have to pay competitive salaries without the capacity for capital value creation.
Many other countries have capital gains tax rates that are similar or equal to income tax rates and investment and growth are demonstrably achievable in these regimes. However, they all have considerably lower income tax rates than the UK and in some (Germany and the Nordics) there is a much greater tradition of long‑term family or employee share ownership. It is also usually the case that the prices paid for businesses in these jurisdictions are less aggressive than in the UK or US.
If the equalisation of rates were to be accompanied by strong support for entrepreneurs, effective arrangements and incentives to support internal share markets, an overall reduced rate of income tax and a plan to replace equity‑based incentives with income‑based ones that didn’t prejudice the current generation of management teams, then conceivably the strategy could result eventually in a more stable economy where the culture was about retention and growth and not about valuable exits. It is undeniably the case, for example, that Private Equity still thrives in Germany, France and the Nordics where alignment of tax rates is much closer than in the UK.
I see little prospect of this headline policy being accompanied by the kind of support and planning it would require, however. A more likely scenario is paralysis in M&A, a return to aggressive tax planning including offshoring, and a shift to less entrepreneurial investment in UK businesses as strategies turn to cash extraction. I am not sure that it would deter the establishment of new businesses, which is rarely a tax‑driven decision, but it would certainly make it harder for new businesses to attract high‑quality senior staff without the carrot of future capital gains.
Whatever one’s politics, seismic tax changes are destabilising and potentially have unintended consequences. Observing how the tax reliefs available to entrepreneurs have already more than halved since 2020, it is guesswork where their tolerance for being taxed ends.
On Thursday 30 April 2026, HMT, together with YFM private equity, had the pleasure of hosting a dinner discussion for the leaders of IT Managed Service businesses in Central Reading. Along with Wendy Hart of HMT and David Wrench of YFM, the discussion was seeded and guided by Peter Sweetbaum, long term ex CEO of ECI-backed Content and Cloud and now Chair of Focus Group (amongst other things!) The discussion was refreshingly open and, without breaching the confidences of those present, the purpose of this brief article is to summarise the themes of the debate and to draw together some of the conclusions reached by the parties present.
Our dinner guests represented a wide cohort of Managed Service Providers from early-stage specialist businesses to much larger MSPs with a wide range of offerings. Despite this, there was a remarkably consistent view of the path to value for MSPs in today’s market and a remarkable consistency of preoccupations for those leading them.
Introduction
We began by discussing the reasons that MSPs have historically been attractive for investors and acquirers, leading to considerable consolidation in the space over the period since the global pandemic of 2020 to 2021. As an initially fragmented sector, simple “for scale” buy and build strategies in the space had permitted investors to bolt together a range of diverse SMBs to deliver cost synergies and multiple arbitrage. This represented a clear and straightforward exit route for the founders of such businesses and was for a while, a win-win.
The view around the table was that some of the M&A associated with this strategy has been poorly executed, resulting in deals focussed on scale for scale’s sake and a lack of meaningful integration. As a result, more recent buy and build strategies have been focussed on filling capability gaps, building vertical credibility and pricing acquisitions more sustainably; a more challenging scenario for sellers and buyers but a clearer eye line to value creation.
This led to a discussion of the ways in which current MSP leaders can best build value in their businesses and a strong steer from both Peter and David (as acquirers and investors of such companies) that a “distinct and compelling” offering, whether it be of technical capability or vertical understanding is the most direct route to value. While measurable ARR will continue to have value for its predictability, there is an increasing acceptance that professional services play a fundamental role in the MSP customer journey; not only contributing to effective and sticky deployment but also creating the differentiation which is a prerequisite of attractiveness as an acquisition target.
While Private Equity and Buy and Build Trade acquirers will continue to have a checklist for the “perfect” acquisition, the mix between professional services and repeatable services is no longer a fixed point on the list. Similarly, while there has traditionally been a tendency to disregard low margin high volume businesses in the space as “commodity”; investors and acquirers are now more willing to look behind the margins to better understand the degree of customer dependency, repeatability and differentiation offered by an individual company.
Inevitably a large part of the evening was spent discussing the role of AI in the MSP space and the wider “panic” around its impact on pricing and value in the sector. It was generally conceded that AI is taking up a lot of board room airspace. It was also conceded, however, that much of the internal debate around AI is currently speculation and hypothesis. All of the businesses present were actively considering how to use AI to reduce cost and increase efficiency, for example around incident analysis and response; but none were actively yet building an AI proposition as part of their customer offering and this was felt to be a little way off yet. Not least because of customer trust. IT services, selfevidently, are business-critical for most MSP customers.
It was felt that over the coming months, AI and the perception of its use in MSP services, was likely to lead to pricing discussion and a shift over time to value pricing for professional services rather than time-based pricing. It was also felt that there was a clear role for AI in terms of customer experience, using agentic models to triage issues and deliver front line advice. Undoubtedly MSPs will see some pressure to reduce the size of service desk teams as AI agents come into play and there have already been attempts to monetise AI solutions in some parts of the market.
We dragged ourselves away from the fascinating, thorny and currently unresolved question of the place of AI in IT MSP services to think about what “distinct and compelling” really means in the MSP context.
Areas of differentiation
Recognising that core IT services are coming under pressure from broader price sensitivity as well as a wide range of SMB providers the following were felt by our guests to be areas of differentiation and real value;
The collection, analysis and re-presenting of customer data (individual or collective) to deliver insights and predictions
Deep verticalization, permitting distinct industry solutions and proprietary knowledge in professional services including self-generated IP.
Pattern mapping in the consumption of products and services in order to offer and deliver packaged solutions that directly address customer needs
Solutions which are embedded deep within customer operations and demonstrably both sticky and business critical
The above factors seemed to play out across MSPs of different scale and focus, with several of our guests referencing occasions where it had been customer relationships and trust in delivery that made a substantive difference to winning or retaining work.
That brought us to the final discussion of the evening which surrounded the question of scaling and succession for the founders and leaders of IT MSPs. It was deemed that the energy and personal commitment of founders to the success of their business, and the passion for their proposition, played a material role in early sales success. This played out in the clarity with which they articulate the proposition as well as the personal investment in high quality delivery. We discussed the challenges of transitioning from a situation where the founders lead the business to a scaled entity, where a professional sales function can take-over. Drawing on the experience of some of the larger businesses represented and of Peter and David themselves, it was agreed that such transition needs to be undertaken slowly and with long periods of handover and co-working and that it puts the recruitment of senior hires firmly at the heart of successful scaling. It was well recognised around the table that an exit is all but impossible if a founder still sits at the heart of sales.
To summarise, at the end of a delicious dinner and an enthusiastic and participative discussion, we concluded that the focus of IT MSP owners should be on delivering organic growth through focus, differentiation and intelligent packaging of solutions, that M&A strategies should be capability focussed and not driven purely by revenue scale and multiple arbitrage and that AI should in the short term be directed at increasing business efficiency and improving the customer experience. While “founder-power” can move mountains, the prize comes from scaling business without loss of energy and culture.
On Thursday 30 April 2026, HMT, together with YFM private equity, had the pleasure of hosting a dinner discussion for the leaders of IT Managed Service businesses in Central Reading. Along with Wendy Hart of HMT and David Wrench of YFM, the discussion was seeded and guided by Peter Sweetbaum, long term ex CEO of ECI-backed Content and Cloud and now Chair of Focus Group (amongst other things!) The discussion was refreshingly open and, without breaching the confidences of those present, the purpose of this brief article is to summarise the themes of the debate and to draw together some of the conclusions reached by the parties present.
Our dinner guests represented a wide cohort of Managed Service Providers from early-stage specialist businesses to much larger MSPs with a wide range of offerings. Despite this, there was a remarkably consistent view of the path to value for MSPs in today’s market and a remarkable consistency of preoccupations for those leading them.
Introduction
We began by discussing the reasons that MSPs have historically been attractive for investors and acquirers, leading to considerable consolidation in the space over the period since the global pandemic of 2020 to 2021. As an initially fragmented sector, simple “for scale” buy and build strategies in the space had permitted investors to bolt together a range of diverse SMBs to deliver cost synergies and multiple arbitrage. This represented a clear and straightforward exit route for the founders of such businesses and was for a while, a win-win.
The view around the table was that some of the M&A associated with this strategy has been poorly executed, resulting in deals focussed on scale for scale’s sake and a lack of meaningful integration. As a result, more recent buy and build strategies have been focussed on filling capability gaps, building vertical credibility and pricing acquisitions more sustainably; a more challenging scenario for sellers and buyers but a clearer eye line to value creation.
This led to a discussion of the ways in which current MSP leaders can best build value in their businesses and a strong steer from both Peter and David (as acquirers and investors of such companies) that a “distinct and compelling” offering, whether it be of technical capability or vertical understanding is the most direct route to value. While measurable ARR will continue to have value for its predictability, there is an increasing acceptance that professional services play a fundamental role in the MSP customer journey; not only contributing to effective and sticky deployment but also creating the differentiation which is a prerequisite of attractiveness as an acquisition target.
While Private Equity and Buy and Build Trade acquirers will continue to have a checklist for the “perfect” acquisition, the mix between professional services and repeatable services is no longer a fixed point on the list. Similarly, while there has traditionally been a tendency to disregard low margin high volume businesses in the space as “commodity”; investors and acquirers are now more willing to look behind the margins to better understand the degree of customer dependency, repeatability and differentiation offered by an individual company.
Inevitably a large part of the evening was spent discussing the role of AI in the MSP space and the wider “panic” around its impact on pricing and value in the sector. It was generally conceded that AI is taking up a lot of board room airspace. It was also conceded, however, that much of the internal debate around AI is currently speculation and hypothesis. All of the businesses present were actively considering how to use AI to reduce cost and increase efficiency, for example around incident analysis and response; but none were actively yet building an AI proposition as part of their customer offering and this was felt to be a little way off yet. Not least because of customer trust. IT services, selfevidently, are business-critical for most MSP customers.
It was felt that over the coming months, AI and the perception of its use in MSP services, was likely to lead to pricing discussion and a shift over time to value pricing for professional services rather than time-based pricing. It was also felt that there was a clear role for AI in terms of customer experience, using agentic models to triage issues and deliver front line advice. Undoubtedly MSPs will see some pressure to reduce the size of service desk teams as AI agents come into play and there have already been attempts to monetise AI solutions in some parts of the market.
We dragged ourselves away from the fascinating, thorny and currently unresolved question of the place of AI in IT MSP services to think about what “distinct and compelling” really means in the MSP context.
Areas of differentiation
Recognising that core IT services are coming under pressure from broader price sensitivity as well as a wide range of SMB providers the following were felt by our guests to be areas of differentiation and real value;
The collection, analysis and re-presenting of customer data (individual or collective) to deliver insights and predictions
Deep verticalization, permitting distinct industry solutions and proprietary knowledge in professional services including self-generated IP.
Pattern mapping in the consumption of products and services in order to offer and deliver packaged solutions that directly address customer needs
Solutions which are embedded deep within customer operations and demonstrably both sticky and business critical
The above factors seemed to play out across MSPs of different scale and focus, with several of our guests referencing occasions where it had been customer relationships and trust in delivery that made a substantive difference to winning or retaining work.
That brought us to the final discussion of the evening which surrounded the question of scaling and succession for the founders and leaders of IT MSPs. It was deemed that the energy and personal commitment of founders to the success of their business, and the passion for their proposition, played a material role in early sales success. This played out in the clarity with which they articulate the proposition as well as the personal investment in high quality delivery. We discussed the challenges of transitioning from a situation where the founders lead the business to a scaled entity, where a professional sales function can take-over. Drawing on the experience of some of the larger businesses represented and of Peter and David themselves, it was agreed that such transition needs to be undertaken slowly and with long periods of handover and co-working and that it puts the recruitment of senior hires firmly at the heart of successful scaling. It was well recognised around the table that an exit is all but impossible if a founder still sits at the heart of sales.
To summarise, at the end of a delicious dinner and an enthusiastic and participative discussion, we concluded that the focus of IT MSP owners should be on delivering organic growth through focus, differentiation and intelligent packaging of solutions, that M&A strategies should be capability focussed and not driven purely by revenue scale and multiple arbitrage and that AI should in the short term be directed at increasing business efficiency and improving the customer experience. While “founder-power” can move mountains, the prize comes from scaling business without loss of energy and culture.
