When starting a business, few people will give much thought to its end. However, after some years, even a small ‘oneman band’ business may have built up a valuable customer list with a goodwill value. It is therefore important that a business owner should consider how and when they might wish to retire from, sell or pass on their business.
This should not be left until just before a disposal as advance planning is key to maximising the potential tax reliefs available.
Business Sale
Whether the business is carried on as a sole trader, partnership or limited company, capital gains tax (CGT) on a disposal of assets or shares will be a major consideration. Subject to any developments following the recent change of government, at present, the first £1m of a gain may be subject to a reduced charge of 10% rather than the normal 20% rate.
This business asset disposal relief (previously, entrepreneur’s relief) is subject to strict conditions, so professional advice is recommended to ensure these are met.
In some fields, the purchaser may want to include an earn-out provision, whereby the seller remains involved in the business for a period and part of the sale proceeds is linked to future business performance. Care needs to be taken to avoid that part of the consideration being treated as employment income rather than a capital gain.
Asset Sale and Liquidation
If there is no ready purchaser for a business that does, nevertheless, have valuable assets, these could be sold or disposed of as a separate exercise. Capital gains will be subject to tax in the hands of the sole trader, partner or company.
If the latter, the funds will then have to be distributed from the company to the shareholders. Double tax charges are a potential issue in such cases.
Employee Takeover
A management team may be willing to take over the company and a disposal of shares to an employee ownership trust may be relevant. Subject to conditions being met, such a share disposal can be made without incurring a CGT liability, although the proceeds may be received over a period paid out of future profits.
Company purchase of own shares If a company has other shareholders, they may buy the leaver’s shares. Alternatively, if it has enough funds, and if it can be shown to be for the benefit of the trade, the company may be able to purchase its own shares.
If specific conditions are met by both the company and the shareholder, this will be treated as a capital gain rather than an income receipt.
The Next Generation and Inheritance Tax
The children or other relatives of the entrepreneur or shareholder may have become involved in running the business and be ready to take over the reins. If this is by a sale of the business or its shares, similar considerations will arise as for a sale to a third party. However, if the takeover happens as a result of death, business and agricultural property is (at present) exempt from inheritance tax (IHT). As usual, this is subject to conditions; but given the normal rate of 40% on assets in excess of the lifetime allowances, this is a valuable relief.
The potential impact of IHT should, of course, be borne in mind by those selling or otherwise disposing of their business or shares as above. The conversion of business assets or shares into cash, while enabling the recipient to pursue other interests or investments, is likely to mean a loss of these IHT reliefs. Steps may need to be considered to mitigate the potentially adverse effect of this.
Practical Tip
When looking at the sale of a business, the tax position of the purchaser will often be relevant, and their needs may conflict with those of the seller. An element of negotiation may therefore be required to reach a mutually acceptable conclusion.