10 tax considerations when selling your company

Tuesday, June 19, 2012 | Posted by: Mike Hyland
Categories: Personal, Protecting your wealth | Tags: tax, capital gains tax, inheritance tax, CGT, IHT, EIS, Mike Hyland, enterprise investment schemes, sale, Entrepreneurs' Relief, Business Property Relief, selling, selling a business, share options, Seed EIS, non-trading assets, company sale

After working for years to build up a successful business, you are likely to want to limit the extent to which the taxman collects the fruits of your labour when you come to sell your company. To optimise your financial position, here are some things to consider before, during and after the sale process.

1. Entrepreneurs’ relief
Entrepreneurs’ relief (ER)  is now worth up to £1.8 million for each individual and this can often be doubled fairly simply to £3.6 million with some advance planning. The conditions for the relief need to be met for 12 months before a sale so you need to think about entrepreneurs’ relief at an early stage.

2. Extract non-trading assets
If there are assets held within the company that aren’t attractive to a potential purchaser – and therefore whose full value may not be reflected in a deal price, such as investment properties held within a trading company – you could consider extracting these assets prior to a deal. This can often be achieved with minimal or no tax cost.

3. Get a lower tax rate on sale
Tax planning is available that can result in an effective capital gains tax (CGT) rate of less than 10% on a company disposal. Again, you need to take tax advice early in the sale process.

4. Share options
Review the position in respect of any share options granted over shares in the company. For example, this may affect other shareholders’ entrepreneurs’ relief, and the exercise of any Enterprise Management Incentive (EMI) options could be delayed until the date of sale in order to maximise the corporation tax deduction available to the company (which can be negotiated to accrue as a price adjustment to the seller).

5. Tax-advantaged shareholders
Consider the position in relation to any shares purchased under tax-advantaged schemes such as the Enterprise Investment Scheme (EIS), where a tax-free sale can be enjoyed after a three-year holding period. While this will not apply to a majority shareholder, due to the 30% shareholding restriction for EIS, it may be relevant in joint venture scenarios or for key directors.

6. Provide for your family
Since trading companies generally qualify for 100% business property relief (BPR) from inheritance tax (IHT), the period before a sale may be a great – and could be your last – opportunity to put significant value into a trust without triggering any immediate IHT charges.

7. Structuring for serial entrepreneurs
If you’re a serial entrepreneur and have interests in several trading companies, or expect to reinvest the proceeds of the current sale into further trading companies, then you may be able to structure the sale to enable proceeds to be reinvested tax-free in other trading companies. This defers the CGT charge until the owner wishes to extract value for personal use rather than reinvestment.

8. Deferred consideration and earn outs
If part of the deal consideration is to be satisfied by way of deferred consideration or structured as an earn out, then check your tax position carefully because there are a number to tax traps you could fall into. You need to ensure, as far as possible, that the rate of tax payable on these sums is minimised and that payment of this tax is deferred until sale proceeds are received.

9. Get tax deferral or exemption by reinvesting
Some or all of the CGT bill on sale can be deferred by making investments under EIS – for which the investor may also be able to receive 30% income tax relief – or potentially be exempted from charge by investing under the Seed EIS.

10. Post-sale exposure
Exchanging valuable shares in a trading company for cash proceeds on a sale is a fast way to increase your IHT exposure, as the cash will not qualify for any inheritance tax reliefs in your estate. A sale is therefore an appropriate time to review your IHT position and consider taking tax and financial planning advice to mitigate your exposure.

If you would like to speak to one of our experts on any of the matters discussed, please feel free to get in contact with me on +44 (0)121 232 5370 or at .(JavaScript must be enabled to view this email address).

Image: (CC) Kevin Dooley

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* Closing a limited company? End of ESC C16 could penalise those extracting funds
* Thinking of selling? Entrepreneurs’ Relief could save you up to £900,000 tax
* Read more posts by Mike Hyland