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Buying & Selling a Business; Tax Advice

To many entrepreneurs selling a company is a once in a lifetime event others are serial investors; in either case it is important that the seller has confidence in his professional team to guide through what can at sometimes be a stressful process.

The old adage is that…

the tax tail should not wag the commercial dog and whilst this must always be the case when it comes to a company sale there are a number of tax issues to consider which can have a significant impact on the commercial issues. Whilst the headline deal price may look attractive if there is unexpected tax leakage the post tax position can look radically different.

For the purchaser there are tax issues to consider in structuring the deal, but perhaps of greater importance is understanding where the vendor is coming from. As noted, achieving his overall tax objectives can significantly influence the net of tax proceeds achieved by the vendor. Thus, there is potentially a deal to be done and some adjustment to the headline consideration.

At[ ETC tax] we have an experienced team and can provide the tax input and planning as part of the overall deal team and often lead the team where the tax structure is the key commercial issue – other than the price!

Typical issues arising include;

  • Entrepreneur’s Relief, this gives a capital gains tax rate of 10% when qualifying shares or an interest in a business is disposed of. There were some concern before Budget 2018 that this valuable relief would be removed , however, although there was some tightening of the qualifying conditions, including increasing the holding period from one to two years , the relief remains.
  • Many deals in the OMB sector include an earn out or an element of deferred consideration, typical linking a proportion of the consideration to future performance or in some instance the deferred element takes the form of shares . Commercially the buyer obtains a degree of certainty as to the ongoing performance of the company and the vendor can maximise value from the sale . Leaving aside the commercial issues and in particular securing the position of the vendor the tax rules here are particularly complicated . If not, correctly structured Entrepreneur’s Relief can be lost or a tax charge advanced ahead of the deferred consideration being received.
  • Where the deferred consideration takes the form of a debt, other than a simple debt, owed by the company to the vendor and repayable at a later date , a corporate bond, the tax position again becomes complicated . The tax legislation draws a distinction between a qualifying corporate bond and a non-qualifying corporate bond, each has its own tax treatment and advantages and disadvantages.

It is often the case that only part of the company is to be sold. This may be where the purchaser does not require the trading premises, or the vendor wishes to retain these and rent them to the purchaser. Alternatively, the company has several trades or elements to its business and the purchaser does not require all. Where this is the case forward planning is called for.

The tax legislation recognises that companies may need to be reorganised or partitioned for commercial reasons and subject to detailed requirements being met allows this to be done in a broadly tax neutral environment. Various taxes have to be considered;

  • At a corporate level possible disposal by the company of its assets,
  • At a personal level , capital gains and possibly income distributions,
  • Stamp duty where shares are transferred and
  • Stamp Duty Land Tax, often the key issue where a trade and trading premises are split.

The tax legislation enables a subsidiary to be sold with no immediate tax cost , Substantial Shareholder Exemption (SSE). Where it is anticipated that only part of the company might be sold it is sensible to plan ahead for SSE. The rules here have been relaxed, non the less they remain detailed and like Entrepreneur’s Relief there is a two year qualifying period.

We are happy to discuss with you your plans or aspirations and work with you to help you achieve your objectives.

Do you have a question about business reorganisation?

Speak to one our Chartered Tax Advisers

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