Tax considerations before you sell your business

Tax considerations before you sell your business

Many business owners reach a time when they decide to sell all or parts of their company. Naturally, they’ll want to get the best deal possible without being hit by unexpected tax and VAT liabilities. Below are some key issues to consider pre-sale.

Shares sale considerations

If you want to exit the business completely, it is often more beneficial to sell the shares in the company as it means the proceeds are paid directly to you, the seller. There are possible tax reliefs, too:

  • Business asset disposal relief (BADR) reduces the rate of capital gains tax (CGT) to 10% on disposals of qualifying business assets, subject to a lifetime limit of £1 million. Rules around claiming include stipulations that the seller must, for a two-year period prior to sale, have held at least 5% of the ordinary share capital and 5% of voting rights, and be entitled to either 5% of the profits available for distribution to equity holders and 5% of assets on a winding up, or 5% of proceeds on the disposal of all of the ordinary share capital of the company.
  • Enterprise Investment Scheme (EIS) relief may allow the capital gain, or a portion of it, to be deferred where sale proceeds are reinvested in qualifying EIS shares.
  • With the disposal of a company from a group of companies, substantial shareholding exemption (SSE) may apply to the sale of the shares, providing a complete exemption from corporation tax of any gain. Rules around claiming include stipulations that the selling company must, for a continuous period of 12 months during the six years prior to disposal, have held at least 10% of the ordinary share capital of the company being sold, and have been entitled to at least 10% of the profits available for distribution to equity holders for those 12 months and on a winding up. It must also have been a trading company, or the holding company of a trading group or sub-group, from the start of the period above to the date of disposal.

However, a shares sale does have some potential drawbacks:

  • The sale of a company from a group could bring a charge if the company leaving the group acquired an asset from another member of the group at no gain no loss in the six years prior to leaving the group.
  • Similarly, stamp duty land tax group relief can be clawed back where the company has previously claimed this on intra-group transfers and leaves the group within three years.
  • The purchasers will carry out due diligence to ascertain any potential exposures and tax risks. The purchasers will be taking responsibility for all historic tax issues and risks. As a result, certain disclosed issues may lead to price chipping.
  • A shares sale should be exempt from VAT, although there could be VAT implications for costs attributable to the disposal.

Trade and asset sale considerations

In cases where trade and assets are sold rather than the whole company, the tax implications depend on the specific assets being sold. Considerations include:

  • The acquisition of the trade will trigger a cessation in the books of the seller’s company and bring an end to the accounting period, so the impact of this should be considered on trading profits and losses.
  • Part of the sale payment may come from assets on which capital allowances have been claimed, so the impact of a balancing adjustment also has to be taken into account. Allocating a larger part of the proceeds to plant may create a balancing charge but could be covered by trading losses.
  • Trading losses will generally be lost by the seller on sale, but there may be some entitlement to claim terminal loss relief. Capital losses will remain behind in the seller’s company and since these can only be offset against chargeable gains arising on the disposal of any capital assets, it may be beneficial to allocate a greater portion of the consideration to capital assets to set against the capital losses.
  • Profits on the sale of assets are subject to corporation tax, and the extraction of post-tax proceeds from the company will give rise to a tax charge on the seller. The cash can be extracted over time in the form of salary, dividends and benefits or as a capital sum through liquidation or informal winding up.
  • Liquidation requires the appointment of a liquidator and therefore additional professional fees for the benefit of obtaining capital treatment in respect of the assets distributed. It may be possible to obtain BADR, giving a 10% CGT rate on the resulting capital disposal where the company is liquidated within three years of the date the company ceased to trade.
  • The VAT implications for trade and asset sales are often complex – particularly on the question of whether the sale qualifies for VAT relief under the transfer of a going concern (TOGC) provisions.
  • If it does qualify, the sale of the business is a VAT-free transaction. However, determining whether it qualifies is not straightforward. TOGC is a tricky topic so it’s best to proceed with professional advice. 

Forms of proceeds

It is not uncommon for a business owner selling up to agree that some part of their payment can be deferred and/or dependent on future targets being met.

The treatment of deferred sale proceeds falls into two categories:

  1. If the proceeds to be received at a later date are fixed or known at the date of disposal, then they are considered ascertainable. The entire amount is included in the CGT calculation at the date of disposal, and therefore the liability due on the whole amount. If the amount actually received differs, there will be a recalculation. Individual sellers can elect to pay some of the CGT by instalments where the date the amount to be received is more than 18 months after the date of disposal.
  2. If the amount to be received is determined by some future event, it is unascertainable. Here, the right to receive future proceeds is valued at the date of disposal and this value is included in the initial CGT calculation. The seller is treated as acquiring an asset at the value recognised in the CGT calculation. If there is a loss when the proceeds are received, the individual seller may elect to carry the loss back against the original gain. If there is a gain, it is subject to CGT and BADR is not available.