The tax you pay on exit has a huge impact on how much money you exit with. With any exit strategy, it is best to plan well ahead and seek advice to ensure you leave with a significant proportion of the sale proceeds so you and your family benefit in the most tax efficient way.

The earlier you plan the better, because some of the conditions that have to be met to qualify for the tax reliefs on exit need to be in place years before the actual sale. Here are some of the taxes and tax reliefs you need to consider:

Capital Gains Tax (CGT)

CGT is paid if you make a profit or ‘gain’ when you sell or dispose of a business asset. You pay CGT if you’re a sole trader, a partner in a partnership or a shareholder in a company when selling your shares.

Other organisations like limited companies, pay Corporation tax on profits from selling their assets.

Business assets you may need to pay tax on include:

• land and buildings
• plant and machinery and fixtures & fittings
• goodwill
• shares
• registered trademarks and intellectual property sales

Your capital gains are subject to an annual exemption, which for many years was £12,300 but this was reduced to £3,000 from 1^st April 2024 onwards. Spreading your asset disposals across a number of years was once a useful planning tool to reduce your CGT liabilities but this strategy now yields little benefit.

Business Asset Disposal Relief

When selling a business, one of the most important tax considerations, is whether you will qualify for Business Asset Disposal Relief (BADR).

With Business Asset Disposal Relief, you pay a lower rate of capital gains tax (CGT) of 10% on the first £1m of proceeds when selling a qualifying business. To qualify you need to meet certain conditions and some of these must be met two years prior to your sale. So, it’s important to plan and not get caught out on a technicality. Effectively, this relief can provide a tax saving of up to £100,000 for those sellers who have planned properly.

Deferral Relief

Some people delay paying CGT using Deferral Relief. This is available when making investments through the Enterprise Investment Scheme (EIS), a scheme established to encourage investment in early-stage UK companies. Although this enables you to defer paying CGT, consideration needs to be given to the fact that EIS investments can be higher risk than other investments. It is worth noting that the relief is only a deferral of CGT and the CGT tax liability that is deferred will be payable later.

Corporation Tax

If you run a limited company, you will need to pay Corporation Tax on any profit or ‘gain’ from the sale of its business assets. Assets include land and property, equipment & machinery, goodwill and other investments such as stocks and shares. The gain is calculated as the difference between what you paid for the asset and what you sell it for. You’ll need to substitute the asset’s market value if your company sold it for less than it was worth to a connected party (such as a shareholder).

Only companies are liable for Corporation Tax, not individuals. That means that if you sell your company’s business and assets in a share sale, you won’t need to pay Corporation Tax. If, however, your company sells its assets itself, then any profit made from them would be liable for Corporation Tax.

Shares

If you are incorporating your business (i.e. selling your business for shares in a company, then there can be some tax benefits in that it is possible to hold over any capital gain on the disposal of your business assets until you eventually sell the shares in the company.

Likewise, if you take part of the proceeds of the sale of your shares in the shares of the acquiring company, you can also “roll over” the gain and effectively defer your tax liability until those shares are eventually disposed of.

Inheritance Tax (IHT)

IHT needs to be carefully considered when selling your business. The proceeds of the sale of your business will be part of your personal estate and could be subject to IHT on your death.

Many business owners don’t realise that they may have no IHT liability on death whilst they own their business or company, but their position completely changes immediately after a business sale, resulting in significant future IHT liabilities.

Gifting significant sums of money to family members after a sale has its own issues and it can still leave you with IHT to pay if the donor dies within 7 years of the gift.

However, with pre-sale planning, you can consider transferring some of your business assets or company shares into a discretionary trust for your children or other family members. On their sale, the trust and not the original donor will receive the proceeds from its asset sale. Whilst the gift into trust must still be made 7 years before the death of the donor to avoid IHT, the trust will allow the donor to control how those funds are applied and provide a measure of protection from profligate family members, or family issues such as divorce.

Such planning is useful as normal trust planning suffers from a restriction in that donations are limited to an amount of £325,000 every 7 years if you wish to avoid an immediate IHT charge of 20% of the excess you gift into trust over the lifetime exemption of £325,000.

Whilst trust planning is much more accessible and less expensive than it used to be, it is still extremely complex, and it is very important to seek professional advice as there are many other factors which impact trusts than we are able to describe above.

Employee Ownership Trust (EOT)

An EOT can be a great way to create an exit and succession strategy for you and your company. An EOT is a tax incentivised scheme that transfers control of a business for the benefit of employees. They can be used to motivate and retain staff as well as providing an exit or partial exit solution for shareholders.

An exit via an EOT can provide tax benefits for both shareholders and employees. These tax advantages are as follows:

Shareholders:

A disposal of a controlling interest in a qualifying company’s shares to an EOT is fully exempt from CGT meaning that no CGT is payable on the proceeds of the sale for the shares sold to the EOT in the year that the EOT is implemented.

Employees:

All qualifying employees can benefit from tax-free annual bonuses of up to £3,600.

Find out more about Employee Ownership Trusts here.

Tax planning for the proceeds of sale

Deciding what you do with the proceeds of sale, how you invest or utilise them tax efficiently also needs careful consideration. To try to make the most of all your tax wrappers and allowances you should consider:

• Individual Savings Accounts (ISA)
• Pensions
• Trusts
• Gifts
• Family Investment Companies (FIC)
• Venture Capital Trusts (VCTs)
• Enterprise Investment Schemes (EIS)
• Offshore Bonds

How we can help

After years of hard work building your business, handing over the reins can be a daunting stage to go through. Whether you’re selling, passing on to family, or considering an MBO, you need to make your plans ahead of time.

When selling a business, there are numerous tax opportunities as well as potential tax pitfalls. Planning is crucial to ensure you do not face either a hefty corporate or personal tax bill.

As part of any transaction, we will work with you to assess and advise on all aspects of tax planning. We will review the tax implications both for the company and for the individuals concerned. We look for ways of minimising your tax exposure and making the whole transaction as tax efficient as possible.

Tax planning for a large transaction can be fraught with pitfalls, so, the more informed and prepared you are early in the process, the greater the likelihood of achieving your financial goals.

Barnes Roffe business sale and business acquisition tax planning

If you’re selling a business, our tax planning services include:

• Advising on deal structure to maximise tax efficiency
• Advising on the tax implications of deal terms
• Tax planning to minimise tax liabilities both pre and post-transaction
• Drafting and obtaining clearances from HMRC
• Reviewing tax warranties and the tax deed

Beware of trying to handle the entire process yourself. Exiting your business in the best way and maximising your return on exit can be a long and complicated process. If you try and do it yourself, it could have a negative impact on the money you exit with, your family’s future, your business performance and your own wellbeing.

For more help and advice, contact us today.

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