Parting on good terms
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Selling a business isn’t straightforward – there are many options to consider before shaking hands on a deal
Words: Jeff Webber Whatever the reason for selling your business, care is needed to ensure it is sold in a way that is right for you. This should include ensuring that the sale is structured as tax-eficiently as possible.
Sell or hand over the reins?
Do you want to keep the business in the family? If you have a child who is already an employee, and you are not relying on the proceeds of a sale to fund your retirement, it may be worth considering transferring the business to them by way of a gift or a sale for less than the market value. An outright gift is an extremely tax-eficient way to dispose of a business – you can transfer it without paying any capital gains tax and also reduce the value of your estate for inheritance tax purposes. You could, of course, receive a salary or director’s fees if you were to retain a role within the business.
What are you selling?
If the business is unincorporated, it will simply be a matter of selling the goodwill and other assets. However, if you own a limited company, you can either sell the shares or the company’s assets. One important aspect for a purchaser is that the acquisition of shares involves the acquisition of the company lock, stock and barrel, including all liabilities. If the business assets include one or more properties, a sale of assets would involve stamp duty land tax at up to 4% to the buyer, compared with a stamp duty cost of only 0.5% in the event of a share sale. If you wish to sell shares, but you are not the only shareholder in your company, you will need to check the Articles of Association and any shareholders’ agreement, as these commonly contain a ‘pre-emption clause’, which requires that any shares put up for sale are irst offered to other existing shareholders.
How should a company be sold?
If the purchaser is a larger company, the owners may offer shares in that company instead of, or in addition to, cash. This route can enable tax on a sale to be deferred until the new shares are sold. It is possible to defer a gain and claim entrepreneurs’ relief (ER) on a future disposal of new shares received in exchange for old shares, if you qualify for ER in respect of the new shares. If you do not qualify for ER in respect of the new shares, you can elect not to defer the gain and instead claim ER on the disposal of the old shares. If you want to part with a company that has other owner-managers but there is no external purchaser on the horizon, a management buy-out or a purchase of your shares by the company itself is an option worth considering. Another popular structure is an ‘earn-out’, under which the amount you receive for the business is paid in stages, perhaps by reference to proits in years following the sale.
Minimising tax The most important tax issue when selling a business is to ensure that you take full advantage of ER, which reduces the rate of capital gains tax on a qualifying disposal from 28% to 10% on qualifying gains of up to £10m per individual. ER can apply to two categories of disposal by