How can I ensure a tax efficient exit from my business?

This question is as old as the hills.  But with tax legislation changing on a yearly basis and getting ever more complex, the question is as fresh and relevant as ever. It is a topic that our advisers have asked us to add into our webinar programme.

So, we have teamed up with Old Mill, who present a great session on this very topic, and I have asked David Maslen, Old Mill’s Head of Tax, to share some of his insight here.  David will be presenting a webinar for Gunner & Co. on July 22nd 2021 outlining some of the tax issues at stake and explaining how, with careful planning, sellers can ensure they maximise their post-tax sale consideration.

David says:

“Tax is a key consideration in any business sale, of course.  But it is not the only consideration and, indeed, it should generally not be the first. The primary objective of any deal should be to ensure it works commercially for the seller. 

However, it is vital the tax implications of an exit are understood so that options for mitigation can be considered and implemented where relevant. Why work hard your entire life, build your company into a valuable asset, only to handover a portion of that value unnecessarily to HMRC on retirement? 

As ever with tax planning, the key word here is “planning”. It is far easier to address the tax position before the deal is done than after. Indeed, given how intricate the law is in the area, and the different ways in which a sale can be achieved, it is vital that tax is considered when discussing and negotiating an outline structure and Heads of Terms with a buyer. Once those Heads are signed, it is very difficult to renegotiate a deal structure.

For company owners, there are two main ways to sell your business to a third party; on a share sale, where the director shareholder sells their shares directly to the third party. The alternative, which is quite prevalent in the sector, is a trade and asset sale. Here, the company sells its trade and certain assets to the buyer. Following the disposal, the shareholder then extracts the company reserves, usually via a liquidation process.

Not only do the two structures present different commercial issues, the tax considerations are also very different for both buyer and seller. Often, a share sale is most tax effective for the seller whereas a trade and asset sale works better for the buyer. This can present a useful negotiating tool when agreeing an outline deal and price.

Whichever route is selected, one key consideration for the vendor will be to get as much of any capital gain arising on disposal covered by Business Asset Disposal Relief or BAD relief (formerly Entrepreneurs’ Relief), due to the lower 10% tax rate. BAD relief requires a number of conditions to be met throughout a 2 year period leading up to the sale, so it is important these are considered on an ongoing basis if a sale is contemplated in the near future.

It is also worth spending time considering what happens after the deal is done. A company sale will see a major change in the vendor’s IHT position. Quite commonly, the shares held will qualify for valuable Business Property Relief.  As soon as these shares are sold and crystallised into a pot of cash, the value realised will go straight into the vendor’s taxable estate. 

Where relevant and commercially sensible, steps can be taken ahead of the sale to mitigate this positioning by effectively preserving the BPR relief.” 

In his presentation, David will expand on the taxation issues arising from the different types of sale. He will also look to unravel the mysteries around BAD relief.  Finally, he will look to highlight some of the potential tax mitigation steps which the business owner might consider to help ensure as much of the value realised on sale his retained by his or her family. To sign up for the webinar, click here.