Tax planning on company sales

Courtesy of Goldsmiths LLP, UK leaders in accountancy practice sales and support

There are many tax issues to consider when dealing with the sale of a company if the vendors are to escape paying tax needlessly.

It is important to maximise the use of annual exemptions from capital gains tax. Currently, gains of up to £10,100 in a tax year can be made without attracting any tax charge. Transferring shares which produce a tax-free gain of £10,100 between spouses shortly before a sale makes good sense as it unlocks another exemption.

If the spouse receiving shares is not a higher-rate taxpayer, they will be taxed on the gain, currently at only 18%, to the extent that the gain (after deducting the annual exemption), when added to their total income, keeps them below the threshold, currently £37,400, for paying higher-rate tax.

But, when transferring shares between spouses, care needs to be taken over entitlement to entrepreneurs’ relief. 

• It is not clever to transfer shares from a spouse who qualifies for 10% tax under entrepreneurs’ relief to a spouse paying tax on gains at 18%
• On a positive note, it is smart to transfer shares from a spouse who does not qualify for entrepreneurs’ relief to a spouse who does. Even though the second spouse will have held those additional shares for perhaps just hours, they will pay tax only at 10% on the gain from all the shares they subsequently sell

The tax due on the gain from selling shares is not due immediately but on 31 January following the end of the tax year in which the disposal takes place. Consequently, it can be good to delay disposals, if possible, so that they fall into the next tax year and so give the vendor an extra 12 months to pay the tax.

Where the sale proceeds are fixed but receivable in instalments, the full amount is treated as received on completion. Relief can be claimed if any instalments do not materialise.

If the future payment is not known, as with an ‘earn-out’, only the present value of the right to extra payment is treated as received on completion.  Later receipts are treated as the disposal of that right and have their own disposal date which can help to spread the tax liability.

If the offer made to the vendor is not wholly in cash but includes shares or a loan note issued by the purchaser, the vendor is usually treated as not making a disposal to the extent that paper is received. Tax clearance is normally sought from HMRC to confirm this deferral treatment.

Subsequent sales of the shares or redemption of the loan notes give rise to separate disposals which, if arising in later tax years, attract additional annual exemptions and new payment dates.

Owner managers may wish to take a last opportunity for their company to make pension provision for them. No immediate tax charge would arise but there would likely be a reduction in the sale value.

Read more business tax advice.

Read about the company purchase of shares & entrepreneurs’ relief, courtesy of Goldsmiths LLP