Getting the tax right on business sales

It will represent the culmination of your career but you only have one-shot at getting it right.  

Critical to maximising your position is getting the tax right. It can make all the difference to a successful deal.

On tax it pays to get your preparations laid out first before you start looking for a buyer. Entrepreneurs’ relief is now an extremely valuable relief which, provided you satisfy the key conditions, reduces capital gains tax to a mere 10% on the first £5m of ‘lifetime gains’ with the blessing of the taxman. It's much better to qualify for this approved relief than have to undertake last-ditch tax planning that could be open to a HMRC challenge.

In respect of company sales, to qualify for entrepreneurs’ relief you have to:

• have shares in a trading company or holding company of a trading group;
• be an office holder or employee; and
• hold at least a 5% of voting shareholding.

Crucially, these conditions have to be satisfied throughout the full 12 months prior to the sale.  That’s why you should start your preparations and seek business tax advice early.

Many businesses have been set up in such a way - sensibly at the time -which deny entrepreneurs’ relief. For example, the following people would pay tax instead at 28% even if they held more than 5% of the voting shares in a trading company on the date of sale:

• a passive investor who was not an employee or office holder;
• a key employee with non-voting shares;
• an employee merely holding options, unless those options are exercised at least 12 months beforehand;
• a director with 5% of the shares but a bank holds warrants over shares which it exercises on the day of the sale, thus diluting the director;
• a director with 5% of the shares where there is a share scheme in place, since exercise of those options would dilute the director below 5%; or
• a spouse who receives an inter-spousal gift of shares just before the sale, unless they already held at least 5% of the shares as an office holder or employee.

All these problems can potentially be corrected if identified at least 12 months ahead of the sale.

Married couples should seek to double their relief to the first £10m of ‘lifetime gains’ by making the non-working spouse a non-executive director of the company holding at least 5% of the voting shares at least 12 months before the sale.

Many vendors think that entrepreneurs’ relief dictates that a share sale is imperative if they are to secure the 10% tax rate. This is a mistaken view.

Even though purchasers often prefer to buy trade and assets from a company, the shareholders can still qualify for 10% tax if they satisfy the qualifying conditions for entrepreneurs’ relief for the full 12 months before the deal and they receive a liquidation dividend within three years of the cessation of trade.

Read about reducing tax on sales for management buy-out teams, courtesy of Goldsmiths LLP