Selling your business can be one of the most significant financial transactions that you make in your lifetime. The tax position will impact on how much of the sale proceeds end up in your pocket.
The expectation may be that the disposal will result in a capital gain, Entrepreneur's Relief will be claimed, and tax will be payable at a rate of 10%. Whilst this may indeed be the case, inadequate planning can result in a very different outcome.
How will the sale be structured?
The most straightforward option is likely to be to sell the shares for cash, but this may not be the most attractive option for a potential buyer: It can put pressure on their cash flow, and create greater financial risk. So, a buyer might push for one or more of the following alternatives: -
- Cash plus some deferred consideration, based on future results;
- A mixture of cash and unsecured loan stock;
- An earn-out; or,
- Acquisition of the business assets rather than shares.
Whilst these options may work well, they can also create unintended tax consequences. For example, where earn-outs are deemed to be income, the tax rate could increase from 10% to 45%!
Entrepreneur's Relief
Unfortunately, there are many examples of claims for Entrepreneur's Relief being successfully challenged by HMRC. However, the risk of such challenges can be minimised with careful planning. A claim may fail for a range of reasons, such as:
- The business is not regarded as trading;
- The disposal is not regarded as a material disposal;
- A shareholder is not an officer or employee of the company; or
- The shares or assets have been held for less than the one-year qualifying period.
If such problems are identified before the sale, additional steps can be taken to shore up the claim, such as delaying the sale or reorganising the share ownership,
In addition to reviewing the availability of Entrepreneur's Relief and the direct impact of a sales agreement on the tax liability, there may be other tax planning points to consider, prior to the sale being agreed, such as:
- Are there any trading or capital losses that can be used prior to sale?
- Are there any cash reserves that could be distributed tax effectively prior to the sale?
- Should any pension planning be undertaken prior to the sale?
Buildings
Particular care is needed with buildings, as the amounts involved, and hence tax consequences can be substantial. One example could be, if you are planning to dispose of a building where there is an option to tax in place. Buildings that are opted to tax may need to be sold with VAT at 20%. It is helpful to identify this type of complication early in the sale process, so that it can be addressed to everyone’s satisfaction.
Similarly, the VAT position of assets within the Capital Goods Scheme should be reviewed at an early stage.
It is not uncommon for the capital allowances position on commercial buildings to be overlooked until late in the sales process.However, these may be valuable. Identifying their value before the sales price is agreed could increase the selling price of the building.
Post-sale tax planning
Having sold your business and converted your business assets in to cash, some level of tax planning might be required depending on the value realised.
- It is possible to reduce or defer the tax liability arising from the sale, by further tax and investment planning; and
- Your shares in the company before sale were safe from Inheritance Tax, but having sold them and converted them into cash, you might leave your estate exposed to Inheritance Tax at a rate of 40%. Again, this can be mitigated by tax planning.
Conclusion
Negotiating your way through the tax maze of selling your business is fraught with complications.
The journey starts with reviewing the ownership structure and the optimum time to sell the business. Then follows a review of the tax implications of any opportunities to sell the business. Having completed the sales process, there can be a re-appraisal of your tax position.
Involving your professional advisors at every stage of this decision-making process may pay dividends in the long term.