There comes a time in every business’s life cycle when the leader has to think about exit strategy and succession.
Whether you’re handing over control of a family business to the next generation, or passing leadership on to a successor within the business, it’s important to think about the tax implications of your business exit.
Here are some options…
A share sale or asset sale?
If you have an SME limited company, the two main ways to sell it are a share sale or an asset sale.
The mechanics of either will be determined by your shareholder’s agreement and articles of association. Expert advice is always recommended.
If you have a choice, the most tax efficient option for the seller is a share sale. You will only be subject to capital gains tax (CGT) on the profits of the share value, which can be at 10% for basic rate taxpayers and 20% for higher rate taxpayers unless exemptions apply. (Higher rates apply to residential property.)
An asset sale involves the buyer cherry-picking what they want from your business while leaving the legal entity and anything they do not want behind – for instance, they may buy equipment, a book of clients, a brand.
An asset sale is less tax efficient for you as a seller as you are subject to corporation tax on any profit from the sale, currently at 19%. At this point, the cash raised is still in your company so you then need to consider how to extract this. There are various methods to do so but usually the aim would be to extract the funds as a capital distribution on the closure of the company, which is then subject to CGT.
Exemptions & Reliefs
Everyone has an annual CGT exemption which is currently £12,300.
There is an extra tax relief for business owners called business asset disposal relief. This allows you to pay the lower 10% CGT rate on the first million pounds of gains, subject to these conditions:
- It is some or all of your business as a partner or sole trader.
- Or they are shares in a company in which you are employed or an office holder and control 5%+ of the net shares, voting rights and distributable profits or disposable proceeds from the sale.
- Or you sell assets that you had lent to your business.
- You must have owned the business for at least two years.
- You must sell the business assets within three years of selling the business.
- The main activities of the business must be trading (property investment companies don’t qualify.)
For sole traders or partners
If your business is structured as a sole trader or partnership, it is still CGT you are subject to (and its reliefs that you can benefit from).
You pay the tax on the profit of each chargeable asset you sell, or your share of the capital gains if a partner.
Chargeable assets include trademarks, goodwill, patents and business premises among other things.
Gifting your business to family
Of course, if you want to keep it as a family business you may not be minded to sell at all. Or perhaps do so, but at a discounted rate.
This approach will still be subject to CGT on the real value (unless it is going to a spouse), but there is some interesting tax relief available here.
Gift hold-over relief may be available if you give business assets away or sell them for less than they are worth. It allows you to not be subject to capital gains tax based on its real value (as you would be with non-business assets), and instead the person you gift to would be liable for any tax due when they sell or dispose of the assets in the future.
There are some common-sense eligibility criteria and an application process, so advice is recommended.
Inheritance tax is another issue when gifting a business. As with any gift, if you survive seven years after making it, it no longer counts towards your estate.
But even if you were to die in this timeframe, your beneficiaries can benefit from business relief on inheritance tax. You need to have owned the business for at least two years before you gifted it and they must keep it as a going concern until your death as the donor.
It is also possible to transfer the business to employees and various methods can be used to accomplish this tax efficiently but the rules are complex and specialist advice will be needed.
We have described many of the main considerations, but it is always worth getting advice on your circumstances as there may be special rules for your situation.
As just one example, qualifying farming businesses get preferential rules on inheritance tax.
If you would like to start planning your exit strategy tax efficiently, get in touch.