Navigating tax on your business sale

First, we need to answer the further question ‘what is being sold?’ It could be shares in a company or the assets of the business. Second, we need to ask, ‘who is selling?’ We could for example have an individual selling shares, or a company owned by an individual selling shares in a subsidiary, or the company or subsidiary selling the assets of its business. Thirdly we need to ask, ‘what are the sale proceeds going to be – cash or some sort of shares or securities in the acquiring company or a mix?’ Different answers to these questions will affect both the tax liability payable and the timing of the disposal.

To make things more complicated the choice of the transaction will not always be up to the vendor. If you are selling, as a generalisation you’ll prefer to be selling shares yourself in a company (and we’ll explore why in the next few paragraphs). The buyer on the other hand will probably prefer to be acquiring a bundle of assets because they will get tax depreciation reliefs for them, and they may have concerns about taking over uncertain liabilities where a company is acquired, read more on this here. So, what are some of the scenarios driving such a wide range of potential tax liabilities?

Paying no tax sounds good…

Zero tax will most commonly be the answer in four sets of circumstances, all of which need the individual to be selling shares:

1. the shares were acquired within the capital gains exemption of the Enterprise Investment Scheme tax code
2. the sale is to an Employee Ownership Trust
3. the vendor is non-UK domiciled and the disposal is of non-UK shares
4. the vendor is a non-UK resident

In both three and four, we are setting aside the exception where the shares being sold owe 75% of their value to UK land.  The last category of non-UK residency is the one most widely accessible to a vendor. Anyone can become a non-UK resident and UK capital gains tax is not generally charged to those who are non-UK residents. There are anti-avoidance provisions which mean that if you have previously been a UK resident, you must usually be a non-UK resident for five complete tax years. You also need to see if where you are moving to will charge the gains under their own tax code. However, if what you always wanted to do after selling your business is to live abroad, and the place you want to live either has no capital gains tax or relieves new residents from the tax, it can be a perfect solution. What are the other possibilities?

10% at least in part…

This is where the disposal, again by an individual, qualifies for either Business Asset Disposal relief (the shrunken version of what used to be called Entrepreneurs Relief) or Investors Relief.  These are much less valuable than the previous Entrepreneurs Relief.

…otherwise 20%
…which is just the standard rate for capital gains tax.

It can get to nearly 40% however…

This can happen in two main ways. First anti-avoidance provisions can recharacterise a capital receipt as a dividend and so make it subject to the 39.35% rate for dividends. Alternatively, if you cannot achieve an individual shareholder level disposal and the disposal is by an underlying company the proceeds may have to come out to the shareholders as a dividend. Even if there is no tax paid on the disposal at the corporate level (usually because it qualifies for Substantial Shareholding Exemption where a trading company is disposed of) the dividend tax will still be payable if the proceeds are distributed as a dividend to shareholders.

…or even 50%+

This can be the result where the disposal is by an underlying company and the company pays tax on the gain. In this case you have two tiers of tax liability: one the tax liability on the company making the disposal; and two the tax liability on the shareholder when the net proceeds are paid out to them. The aggregate of these two tiers of liability can take the effective tax rate to over 50%. The highest rates can occur if the Employment Related Securities, or Disguised Remuneration rules can operate to treat the proceeds as earnings in which case they can be taxed as employment income with NIC charges on top. Definitely to be avoided if at all possible.

What then do we aim for in any transaction?

With all these different possibilities in play, there is no ‘one size fits all’ solution. However, the broad strategy is obvious.  First, we will try to eliminate the possibility of the effective rate being more than the core rate of capital gains tax of 20%.  Next, we’ll explore whether any of the 0% strategies might fit for you. If not, then we try to create the lowest possible effective rate by a mix of strategies which will usually include maximising Business Asset Disposal relief.  

With all the complexity discussed above, Inheritance Tax is often overlooked. It shouldn’t be however, since from the point you sign the contract for sale the value in your business will almost always move from being fully relieved from IHT as a result of Business Property Relief, to potentially having full IHT exposure at 40%. So, if you sell your business for £50m net of taxes, you could acquire a new potential IHT liability of £20m. To read an article on how to plan for Inheritance Tax please read here.

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