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Selling a Privately Owned Business – Briefing 8 – 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.

You should always plan early and 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. Entrepreneurs’ relief (ER) reduces the rate of capital gains tax (CGT) on disposals of certain business assets from 20% to 10%, if all conditions are met.

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 some while ago now 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 Finance Bill 2018/19 contained draft legislation outlining the two important changes to ER, affecting business owners and their management teams.

  • The Chancellor announced an increase to the holding period for shares held by individual shareholders. Individuals will now need to hold the shares for at least 24 months rather than the previous 12 months before they can claim ER on the disposal of shares. This change will apply to disposals made on or after 6 April 2019.
  • The second change introduced further tests that must be satisfied before ER is available. This means that along with the existing requirement that an individual holds 5% of the ordinary share capital and votes of the company (test 1), the individual must also be ‘beneficially entitled to’ either:
  • 5% of profits (dividends), and assets available for distribution to equity holders on a winding up of the company (test 2), or
  • 5% of the sale proceeds had the whole of the ordinary share capital of the company been sold on the day of the disposal (test 3). 

Any individuals who sell shares without satisfying these 5% tests (either tests 1 and 2 or tests 1 and 3) will not be eligible for ER. 

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.

Posted on by Mike Halls

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