Selling a Privately Owned Business – Briefing 7 – Tax Considerations
Tax considerations are always an important part of the early planning for a sale of a business, and should be considered now before the real process of sale begins.
Our advice as M & A advisers is always to plan early and to take specialist tax advice alongside any other advice and support you as owner may be receiving. Tax regulations change regularly and it is only through dealing with Tax on a daily basis that one can be fully up to date with all developments.
The main tax consideration on a business sale is Entrepreneurs Relief, where a lower rate of Capital Gains Tax (CGT) can be payable. There are certain relevant pre – conditions, together with a number of permutations depending on individual circumstances, so some advance planning is critical to maximise the tax relief available.
Presently Entrepreneurs’ Relief remains at what is effectively its most advantageous rate since it was originally introduced. The effective rate if all conditions are met will be 10%.
Entrepreneurs’ Relief is available to all shareholders, including husbands, wives or civil partners, up to the maximum amount available, provided that each satisfies the relevant conditions.
The lifetime limit on capital gains which qualify for relief doubled in 2011 to its present level of £10m. This is a cumulative limit for each person for the duration of their lifetime, so is available over any number of transactions up to that total amount.
The key conditions are that each shareholder must have held the assets being sold – which in practice will normally be the shares in the company – or the actual business assets being sold – for at least a year. In the case of shares at least 5% of the total shares must have been held, and the seller must have been an employee (or director) for the whole of the final year prior to sale.
So, by way of planning, common actions such as transferring assets to a spouse before sale to reap tax benefits could be a problem as, unless they too have held the shares for the final year and have been an employee or director of the company, they may not qualify.
Also, if profits have been built up in the company, and the level of reserves increases to the point that the company has more than 20% of “ investment or non-trading” activity, then this may no longer qualify.
Care also needs to be exercised if the company has issued share options that are exercised on a sale, as these may dilute other holdings below the 5% minimum as a result of a new share issue.
Finally, not all assets will automatically qualify, although some other assets (such as property) can qualify, but may require special consideration.
To summarise, all business owners planning a sale should always take tax advice, either from their accountant or a tax specialist, in advance of any sale exercise, to ensure that this valuable tax relief is maximised.
28 June 2017