Written by Steve Martin
Senior Client Services Manager
Ward Goodman
August 7, 2024
As a Senior Client Services Manager at Ward Goodman, I’ve had the privilege of guiding numerous clients through the intricate process of selling their businesses, working in conjunction with the rest of the Ward Goodman team, and their other professionals and advisors. One of the pivotal aspects of this journey is ensuring that the sale is structured in a tax-efficient manner, which aligns with my clients’ longer term personal objectives. Today, we delve into the critical tax considerations when selling a UK business, exploring various sale structures, personal tax implications, and potential pitfalls.
Deciding on the Structure of the Sale
When contemplating a business sale, the structure—be it a share sale, asset sale, or management buyout—plays a crucial role in determining tax efficiency and minimizing disruption. The choice hinges on factors such as the target asset, the buyer/seller type, and the company’s economic state, and any future plans for the sale proceeds. Here, we examine trade sales, sales to private equity, and employee ownership trusts, highlighting common caveats to consider with each.
Personal Tax Considerations
Direct Sale of Shares by an Individual
A direct sale of shares in a UK business triggers Capital Gains Tax (CGT) implications. The net chargeable gain is subject to CGT, calculated by deducting allowable costs and the annual exempt amount (£3,000 for individuals from 2024/25). CGT rates are 10% for basic rate taxpayers and 20% for higher/additional rate taxpayers. It is important to note that the 10% basic rate is only applicable if the gain does not push the taxpayer into a higher tax bracket. Notably, reliefs like Business Asset Disposal Relief (BADR) can reduce the CGT rate to 10% on gains up to £1 million, provided specific conditions are met.
Transfer of Shares to a Trust
Trusts used correctly can facilitate succession planning in a really flexible way together with enhanced asset protection. However, transferring shares to a UK resident trust introduces different tax considerations. While there’s no immediate income tax charge, CGT applies based on the market value of the shares. Holdover Relief can defer this charge, provided the trust is not settlor-interested. Additionally, Business Property Relief (BPR) can eliminate the lifetime charge to Inheritance Tax (IHT) charge, assuming the shares qualify.
Corporate Tax Implications
Asset Sales
Buyers often prefer asset sales to avoid inheriting historic liabilities. Asset sales allow buyers to pick specific assets beneficial to themselves, along with potential tax deductions for the assets acquired. However, tax losses on sold assets are generally forfeited. Transfer taxes such as Stamp Duty Land Tax (SDLT), Stamp Duty Reserve Tax (SDRT), and VAT may apply, with specific reliefs like Transfer of a Going Concern (TOGC) offering exemptions.
Share Sales
Share sales, particularly in private equity structures, involve different tax dynamics. The Substantial Shareholding Exemption (SSE) can relieve corporation tax for selling companies meeting specific criteria. For private equity, leveraged financing structures must be reviewed for potential tax deductions related to loan relationships.
Selling to Private Equity
Private equity sales are typically approached in a structure plan but can vary based on the buyer/seller. Earn-outs, common in such deals, need careful tax planning to avoid being taxed as earnings rather than capital gains. Tax-advantaged plans like Company Share Option Plans and EMI schemes can help align interests and optimize tax outcomes.
Selling to an Employee Ownership Trust (EOT)
Selling to an EOT has its tax advantages, including a CGT exemption for the seller. The trust holds the sale consideration on behalf of employees, funded by future company profits. Ensuring the transaction meets qualifying conditions for CGT relief is essential, particularly around trading status and share proportion transferred.
Key Takeaways
Selling a business can be one of the most significant events in an entrepreneur’s life, requiring tact when considering planning tax-efficiency. This process requires meticulous planning and a deep understanding of the various tax implications. From direct share sales and trust transfers to private equity deals and EOTs, each option presents unique opportunities and challenges. As always, obtaining specialist tax advice tailored to your specific circumstances is crucial to navigate this complex landscape effectively.
For further guidance on structuring your business sale and optimizing tax outcomes, feel free to reach out. At Ward Goodman, we’re dedicated to providing you with the expertise and support needed to achieve a successful and tax-efficient exit.
