Top 10 tax considerations when selling a business

Tax considerations can be vital in a selling a business. The ability to structure a sale on a tax-efficient basis is central to maximising shareholder value. Reviewing the position in advance of selling a business may identify opportunities. These opportunities can be capitalised on and any risks dealt with.

We outline our top 10 considerations when selling a business below. However, we always recommend professional advice on a timely basis. This should be tailored to individual circumstances, with specialist tax support through the transaction process.

1. It’s all about BADR

Over recent years, the ability to sell shares in a company with the benefit of a 10% tax rate has been a major attraction for vendors. Business Asset Disposal Relief (BADR) has provided the means to achieve this. However, there are a number of requirements which, if not met, result in a loss of relief.

A successful claim for BADR requires conditions to be met over a period of two years prior to the sale. Where shares are sold, the company must be a ‘trading company’, the shareholder must have a sufficient shareholding and must have been an officer or employee throughout the period of two years prior to the sale.

If there’s a problem meeting any of the conditions and changes are needed, there will generally need to be a further period of two years before BADR is available on a sale.

Ensure you avoid making last-minute changes without taking tax advice. The conditions for relief must be met right up to the sale. A shareholder resigning their directorship or employment shortly before a sale, for example, would lose entitlement to relief.

There is also the potential of selling your shares to an Employee Ownership Trust (“EOT”). Provided the rules are met, no Capital Gains Tax (CGT) would be payable.

2. Securing capital gains tax treatment

Where BADR is not available, a disposal at the current CGT rate of 20% is still quite attractive. However, there are risks to the availability of CGT treatment which may result in sales proceeds being taxed on a much less favourable basis. It’s important to make sure the risks are mitigated.

3. Income tax risk #1: employment-related securities

Most shares held by owner-managers will be employment-related securities (ERS). The ERS regime can subject part of the proceeds from a sale of shares to income tax at rates of up to 45% and to employee’s and employer’s NIC.

For example, where arrangements are made to provide an employee-shareholder with a share of the sale proceeds in excess of what would be expected, based on the shares they hold, the excess is likely to be subject to such charges.

4. Income tax risk #2: buy-outs

Where shares are sold as part of a management buy-out or similar transaction, HMRC has the ability to reclassify shareholder capital gains as income. It will then subject the proceeds to income tax at dividend rates in some cases.

The rules won’t be invoked where the transaction is carried out for bona fide commercial reasons (e.g. business succession).

5. Changes may be afoot…!

The cost of BADR to the Exchequer has come under increasing scrutiny. Most political parties are proposing to review, reform or repeal BADR. We don’t know what the outcome will be or how quickly any changes may come. There is the possibility of reverting back to the Taper Relief rules we had previously. The possible withdrawal of BADR is something to consider in cases where there’s an opportunity to accelerate a sales process.

Likewise, the CGT rate of 20% may also come under review. This has raised the possibility of a significant increase in rates of taxation of business disposals going forward. However, with a general election looming (and likely set for the first part of 2024), will the Chancellor stick with the status quo?

6. Shares or assets?

Whether a sale is structured as a sale of shares or a sale of the company’s assets might be steered by the negotiating dynamic between vendor and purchaser. In any case, it is important to appreciate the differences in tax outcomes.

A sale of business and assets will frequently result in tax being paid at company level on gains realised from the sale of chargeable assets such as property and goodwill. The shareholder will then be subject to tax (ideally CGT with the benefit of BADR) on a subsequent winding-up of the company and extraction of the proceeds of the sale.

Professional costs are likely to be higher on an assets sale.

7. It’s a wind-up!

Following a sale of trade and assets, a solvent liquidation process may be needed to extract the proceeds of the sale. Distributions to shareholders ordinarily attract CGT treatment. However HMRC has the ability to invoke tax provisions to tax them as income where the shareholder becomes involved in a similar business activity within the following two years.

8. Pre-sale demerger

Vendors should consider what a potential purchaser wishes to acquire. For example, it is unlikely they would want to acquire non-core investment assets. Finding a means of enabling the purchaser to acquire only the activities they want can introduce complexity and tax inefficiency to a sales process.

9. Looking after non-shareholders

The commitment of key staff will be central to ensuring the success of a sales process. Without forward-planning, the ability to reward these individuals will likely be limited to bonuses taxable as employment income.

Consider establishing more tax-efficient incentives in advance. An Enterprise Management Incentive share option scheme might provide a more compelling and tax-efficient solution for all parties.

10. Inheritance tax

In selling their business, many owner-managers move from a position in which most of their wealth (in the form of their shares) is protected from inheritance tax (IHT) through business property relief to one in which their wealth (the cash proceeds of sale) is fully exposed to IHT at a rate of 40% on death.

Consideration should be given to addressing this pre- and post-sale. For example, consider Business Relief (BR) qualifying investments, gifts, the use of trusts, family investment companies or life insurance. These are complex areas requiring careful tailoring to individual circumstances. However the savings that could be achieved are often very large.

Get in touch

For further advice on tax-efficient business transactions or sales, please get in touch with a member of our business tax team on 01903 234094.