How to achieve a tax efficient business exit

How to achieve a tax efficient business exit

The options and tax implications of selling your business

There are many options when it comes to selling your business and although some are more efficient from a tax perspective, it’s also important to consider the commercial aspects and ultimately what you want to achieve.

The way you exit the business can have some important tax implications, which may affect the money you get back from the sale. So, it’s worth planning early ahead of the disposal to optimise the value and achieve a tax efficient sale.

Below outlines the tax position of a number of exit options:

Sale of assets v sale of shares:

Typically from a tax perspective it is often beneficial for the exiting shareholder to sell their shares in the company. The shareholders will receive the proceeds of the sale personally and will pay Capital Gains Tax on the profits (on the basis that the company sold was not part of a group).

The alternative is for the new purchaser to buy the trade and assets from the company. This will allow the purchaser to choose which assets they want, leaving any unwanted assets and history within the company. The exiting owner will potentially be subject to a double tax charge as any gains arising on the sale of the trade and assets will be subject to Corporation Tax within the company, then the individual will also be taxed on taking the remaining funds out of the company.

Liquidation or winding up:

Where the sale of the company is via trade and assets, or where a business naturally comes to an end, the company will need to be closed down. This can be carried out via a formal liquidation or potentially an informal winding up. It may be possible to achieve this in a way that allows capital treatment of the final distribution.

Management buyout:

Where there is a management team that will take over the ownership of the company, they can buy out the existing shareholders. There are a number of ways that this can be structured.

Company purchase of own shares:

Where an individual is exiting from the business, the company may be able to purchase the shares. The exiting shareholder may be able to receive capital treatment if certain conditions are met. However, the company must have sufficient reserves in order to service the purchase and the buyback must be for the benefit of the trade.                                                                                                                                    

There are a number of other requirements that need to be met in order for the capital treatment to apply, including the fact that the company must be an unquoted trading company, the seller must have held the shares for 5 years, the shareholding must be substantially reduced by at least 75% and the exiting shareholder cannot be connected to the company after company purchase of own shares has taken place.

Business Asset Disposal Relief

The proceeds of the sale may qualify for Business Asset Disposal Relief (BADR) if the applicable conditions are met.

If the disposal qualifies for BADR and the individual has unused lifetime limit (currently £1million), then up to the first £1million of the gain is taxed at the lower 10% rate with any excess above the available lifetime allowance being subject to tax at 20%.

Inheritance Tax:

It’s also important to consider your IHT position as part of the exit plan, as you will potentially be disposing of a business that is protected from IHT to cash that will form part of your taxable estate.

The above only provides a brief overview of several different exiting strategies. However, every business sale is different and so it’s important to discuss your objectives and intentions with a professional. That way, you can work together to ensure that the best exit strategy for you and the business can be implemented.

Please get in touch with our offices in Wirral, Liverpool and Chester, if you would like to explore your exit planning options.