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
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
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
- 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
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
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.
21 October 2019