With the continued impact of COVID-19 and Brexit, many business owners may be thinking of selling on. Speculation around tax rates going up after the next Budget may be a further reason to think about selling sooner rather than later.
If you are thinking about selling your business, tax considerations can be vital in a business sale. The ability to structure a sale on a tax-efficient basis is central to maximising shareholder value. A review of the position in advance of marketing a business for sale may identify opportunities which can be capitalised on or risks which can be dealt with.
We outline our top issues below but would always recommend professional advice on a timely basis, tailored to individual circumstances, and specialist tax support through the transaction process.
1 It’s all about BADR
Over recent years, the ability to sell shares in a company with the benefit of a 10% tax rate has been a major attraction for vendors. Business Asset Disposal Relief (BADR), previously called Entrepreneurs’ Relief, has provided the means to achieve this. However, there are a number of requirements which, if not met, result in a loss of relief.
A successful claim for BADR requires conditions to be met over a period of two years prior to the sale. Where shares are sold, the company must be a ‘trading company’, the shareholder must have a sufficient shareholding and must have been an officer or employee throughout the period of two years prior to the sale.
If there is a problem meeting any of the conditions and changes are needed, there will generally need to be a further period of two years before BADR is available on a sale.
Ensure you avoid making last-minute changes without taking tax advice – the conditions for relief must be met right up to the sale. A shareholder resigning their directorship or employment shortly before a sale, for example, would lose entitlement to relief.
2 Securing Capital Gains Tax treatment
Where BADR is not available, a disposal at the current Capital Gains Tax (CGT) rate of 20% is still quite attractive. However, there are risks to the availability of CGT treatment which may result in sale proceeds being taxed on a much less favourable basis. It is important to make sure the risks are mitigated.
3 Shares or assets?
Whether a sale is structured as a sale of shares or a sale of the company’s assets might be steered by the negotiating dynamic between vendor and purchaser. In any case, it is important to appreciate the differences in tax outcomes.
A sale of business and assets will frequently result in tax being paid at company level on gains realised from the sale of chargeable assets such as property and goodwill. The shareholder will then be subject to tax (ideally CGT with the benefit of BADR) on a subsequent winding-up of the company and extraction of the proceeds of the sale.
4 Looking after non-shareholders
The commitment of key staff will be central to ensuring the success of a sales process. Without forward-planning, the ability to reward these individuals will likely be limited to bonuses taxable as employment income.
Consider establishing more tax-efficient incentives in advance. An Enterprise Management Incentive (EMI) share option scheme might provide a more compelling and tax-efficient solution for all parties.
5 Inheritance Tax
In selling their business, many owner-managers move from a position in which most of their wealth (in the form of their shares) is protected from Inheritance Tax (IHT) through Business Relief (BR) to one in which their wealth (the cash proceeds of sale) is fully exposed to IHT at a rate of 40% on death.
Consideration should be given to addressing this pre- and post-sale, for example, through Business Relief qualifying investments, gifts, the use of trusts, family investment companies or life insurance. These are complex areas requiring careful tailoring to individual circumstances, but the savings that could be achieved are often very large.
Changes may be afoot
The cost of BADR to the Exchequer has come under increasing scrutiny and most political parties are proposing to review, reform or repeal BADR. We do not know what the outcome will be or how quickly any changes may come. The possible withdrawal of BADR is something to consider in cases where there is an opportunity to accelerate a sales process.
Likewise, the CGT rate of 20% may also come under review, raising the possibility of a significant increase in rates of taxation of business disposals going forward.
Any CGT changes are likely to be effective from the next Budget day. There is no fixed date for this, but we are assuming for the deals we are currently working on that the Budget will be in March 2021. The process of selling a business often takes six months or more, but with well-motivated buyers and sellers, it is still possible to do something now.
Get in touch
For further advice on tax-efficient business transactions or sales, please get in touch with a member of our friendly team of tax and business advisers.
Please visit www.carpenterbox.com or call David on 01903 234094.