Planning an Exit Strategy

Planning an exit strategy is the surest way to leave your business on your own terms.

Did you know?

Forward planning for an exit can reduce exposure to tax and enhance the value of an eventual deal.

Need to know…

Whatever your eventual reasons for exiting your business, planning an exit strategy will enable you to take maximum control and derive maximum value from the transaction.

It’s never too early to start thinking about your exit from your business.

At some point, business owners are likely to want to pass on the company to the next generation, or indeed to sell to a third party – whether those owners are serial entrepreneurs, and will start all over again; or whether they want to retire and live out their days in a sunnier climate!

Done properly, planning an exit strategy requires a long term approach. It takes time to get your business ‘match ready’ for disposal.

Tax is a complex and pervasive issue impacting every stage of the exit planning process.

How your business is structured, its tax position, whether you are selling business assets or selling shares, or maximising available tax benefits such as Entrepreneurs Relief and Business Property Relief. These will all impact both the attractiveness of your business to potential purchasers and your tax exposure resulting from an exit.

But for business owners, planning an exit strategy goes beyond the commercial drivers. Personal considerations have to be given due attention and consideration. Ensuring your exit will help you meet your future lifestyle, income and security objectives, means effective exit planning should also encompass wider asset management and planning.


What is Entrepreneurs’ Relief?

Entrepreneurs’ Relief (“ER”) is a highly attractive tax benefit where certain conditions are met.

ER provides for a 10% effective rate of capital gains tax on the disposal of assets, rather than the usual 20%. The reduced rate applies to lifetime gains of up to £10 million.

ER is not available in all instances. To qualify, the following criteria – at a glance – must be satisfied:

  • The individual is required to hold at least 5% of the ordinary shares and voting rights of the shares in a trading company (or holding company of a trading group).
  • The individual disposing of the shares must be held by an officer, such as a director, or employee of the business.
  • The shares to be sold must have been owned by the individual for at least one year.

Effective tax planning can help ensure eligibility for ER by meeting the qualifying criteria. Alternatively, managing the circumstances that could preclude the availability of the relief – such as holding too many investments on the balance sheet or the directors spending substantial time on non-trade related activities.

When planning for an exit, we can advise on all related aspects of ER to help you maximise tax relief benefit.


What is Business Property Relief?

Business Property Relief (“BPR”) is a highly attractive tax relief that offers up to 100% relief against inheritance tax on qualifying business assets. These include a business or interest in a business, or shares in an unlisted company.

50% Business Relief is available on:

  • shares controlling more than 50% of the voting rights in a listed company
  • land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled
  • land, buildings or machinery used in the business and held in a trust that it has the right to benefit from

Importantly – BPR is only available where the deceased owned the business or asset for at least 2 years before they died. Another reason to start planning for an exit sooner than later.

A number of conditions apply to BPR, we can advise on your individual circumstances to maximise relief available.

What is the tax position for contractors planning for an exit?

For contractors looking to take up retirement or change status to an employed worker, the potential tax implications will require careful strategy.
There are three possible options for contractors to extract funds from a company that is no longer required. Each has its own pros and cons, which we can advise on in line with your individual circumstances:

  1. Make pension contributions and/or take additional directors remuneration.
  2. Leave the funds within the company and slowly extract them year by year to avoid paying higher and additional rates of income tax.
  3. Use Members Voluntary Liquidation (MVL) if you are in need of immediate funds.

MVL is the process of winding-up a solvent company and distributing its assets to its shareholders.

In the case of winding up a company for the purposes of retirement and/or leaving behind a career in contracting to pursue employment, you may be eligible to treat such a distribution as a chargeable gain subject to the lower rates of capital gains tax (as opposed to income tax) and – subject to certain conditions – would qualify for ER, ie a reduced 10% tax rate against the proceeds of the disposal (as opposed to the higher rates of capital gains tax).

Relatively recent rules around the taxation capital distributions on a winding up might make this a less attractive route where the contractor is contemplating returning to a similar form of working in the near future.

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Here to help

As experienced tax consultants, ETC help business owners plan for the tax consequences of exiting a business.

Through effective tax planning, we can help you meet your personal and commercial objectives by minimising exposure to tax, including Capital Gains, and maximising value of any eventual deal.

It is more important than ever for entrepreneurs to take time to properly consider the structure of the business such that it is as tax efficient as possible, and in meeting personal and commercial objectives.

We have substantial experience advising entrepreneurs – both directly and as clients of other professional advisers – on all aspects of tax when planning an exit strategy. As with all of our tax planning, we start by understanding each client’s individual objectives – commercial and personal – before we look at the tax position.

Whatever stage you are at with your exit planning – whether you have been approached by a potential buyer or whether you are starting up a business and want to start as you mean to go on – we can help you secure a favourable tax position to support you in realising the full potential of your company through the exit process.

We advise on all aspects of the exit process, from preparing your business for sale, to providing tax advice on deal structure, and mitigating potential tax risks such as double taxation.

We are also highly experienced in advising on availability and use of tax benefits such as Entrepreneurs Relief and Business Property Relief.

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