Your business is only worth what you get after tax, so you need to be as tax efficient as possible when selling your business and plan well in advance.
If you are thinking of selling your business, this blog is for you.
Selling-up may be one of the most exciting things you ever do. For most, it will be a once-in-a-lifetime event — all the more reason, then, why you need to get this right.
A lack of preparation can have lifelong negative effects.
"Many owners have little to no exit planning in place even though many of them have 80% to 90% of their financial assets based in the business itself." Exit Planning Institute.
Selling your business is a major undertaking which demands a lot of time and effort. It’s usually a far from simple procedure. The process of preparing a business for sale can take months. This includes deciding on a valuation, finding the right buyer, negotiating the terms and undergoing the process of due diligence.
With all the complexities surrounding a sale, key considerations may be overlooked, and one of these concerns the repercussions for tax. Tax compliance around a business sale can be a tricky area and, if you are not careful, can lead to deals breaking down.
Unless you take appropriate steps to claim available relief, selling shares in your company could see a large chunk of your proceeds swallowed up by Capital Gains Tax (CGT).
When you prepare to sell a business – and also during any negotiations that follow – tax planning needs to be front and centre in your mind. There is much to consider in this technical area, but here are two key aspects to focus on as you plan for your sale.
Tax as part of the sale negotiations
Purchasers will expect robust evidence that your business is compliant with the relevant rules on taxation. The last thing they want is to buy a going concern and then come under scrutiny from HMRC. They’ll be especially unhappy to discover any liabilities connected with events before they took control.
The due diligence process scrutinises your company accounts and throws up any signs of non-compliance like unpaid or delayed tax bills. If issues like this do come to light, a careful purchaser is bound to wonder if you have any other unpleasant surprises in store.
Poor record-keeping can give a buyer cause to have second thoughts, as it will likely attract the attention of the tax authorities.
As well as ensuring internal taxation processes are robust and compliant, it is important to think about how tax will affect any deal you strike. The fact is, the tax obligations of buyer and seller alike will be influenced by the structure of any sale.
There will be options that provide tax benefits for either party, but not always for both. Be aware of what kind of deal structure will deliver the best results for you. It is necessary to be open-minded about the fact that the other side might want something different. Compromise is the watchword.
Having a tax specialist on board is essential. Among other things, he or she can help with the tax implications of deferred payments, earn-outs, and taking shares in the purchasing company. Structurally, the specialist can also advise you on how these matters can be arranged to the advantage of both sides.
Taking shares in the company buying your business may defer your having to pay tax on the proceeds until the shares are sold. But by then the proceeds may not qualify for any tax relief. Take care that earn-outs are structured, so there is no risk of HMRC labelling them as disguised salary. Be careful, too, that share-sale earnings don’t end up being liable for Income Tax at a worse rate than CGT.
Planning for tax relief
The main option available for reducing CGT on the proceeds of your business sale is Entrepreneurs' Relief. This is available to sole traders and business partners looking to sell all or part of a business. It’s also open to employees or office holders looking to sell shares, with a two-year qualifying period in each case. Entrepreneurs’ Relief lowers the CGT rate from 20% to 10%.
Any seller should be delighted at the prospect of reducing the tax on their sale proceeds by half. So, ensure you meet the qualifying criteria. There are other options for getting relief on CGT. They focus on delays or reductions if you use the proceeds to purchase new business assets or invest in qualifying companies.
Selling your business has implications for other areas of your personal tax liabilities. One of the areas most directly impacted is Inheritance Tax. This is especially important for business owners selling later in life, with a view to providing for their families.
Shares in a privately held trading business become exempt from Inheritance Tax under Business Relief. Once you sell the shares, the relief disappears. The proceeds may end up pushing your estate above the Inheritance Tax limit.
As with tax affairs in general, so with selling a business in particular: getting independent, specialised advice is a very sensible move.
Want help to plan your business sale? Speak to one of our chartered financial planners. Contact Capital today.