4 things you need to consider before selling your business

28 October 2020

Business owners work hard all their life to build a business and so it’s only natural for them to want to ensure they realise the hard-earned gains as tax efficiently as possible when they eventually sell. Fortunately, with some considered pre-planning, it’s possible to reduce the amount of tax paid, whilst ensuring the business is structured correctly for the buyer on a sale, by taking advantage of existing tax reliefs.

We recognise the current pandemic might have altered the timing of an anticipated sale for many businesses, however, the fact remains that careful planning should be undertaken well before even the first discussions with a potential buyer.

We’ve outlined below some of the key tax considerations prior to selling a business;

1. Availability of Business Asset Disposal Relief (BADR)

Over recent years, the ability to sell shares in a company with the benefit of a 10% tax rate has been a major attraction for vendors. However, following the recent budget, the relief’s been significantly impacted by reducing the lifetime limit for qualifying gains from £10m to £1m, the level it was, when first introduced in 2008.

It would be safe to assume a percentage increase in tax rates in general, coming as early as next year’s budget.

What can be done pre-sale? 

  • Consider the qualifying conditions and whether the company will meet the trading criteria. Excess cash and/or investments in the business which are surplus to working trading requirements can often cause an issue, click here to see how.
  • Whilst the rate of BADR’s currently at 10% with a lifetime limit of £1m, this may change and possibly reduce in future. If this is a concern, it’s possible to explore methods through which a tax charge at the current rates of BADR can be explored earlier.
  • Research any opportunities to secure more than a single £1m lifetime allowance on sale. Splitting shareholdings between spouses employed in the business (even just as directors), can open up a second lifetime allowance where all conditions are met.

2. Incentivising Management

One key way of driving the value of the business to achieve the highest possible purchase price is appropriately incentivising your workforce – particularly those who’ll be key to a successful exit. Choosing the right incentive package can lead to significant tangible benefits.

What can be done pre-sale?

One of the most effective ways to incentivise employees is to allow for them to partake in the future sale by benefitting from the business’ revenue. This can be achieved in the most tax efficient manner through the use of Enterprise Management Incentive (EMI) share options. From a tax perspective, the exercise price for EMI options should generally be set at the market value of the shares at the date the options are granted. The result’s that those with shares, any gains on the eventual sale should qualify for the special reduced BADR rate for Capital Gains Tax (CGT) (currently 10%), provided that at least 2 years have passed between the date of grant and the eventual sale.

3. Pre-sale structuring

The shareholders and directors should consider what’s being offered for sale. If the objective’s to sell only part of the company’s activities, or to retain certain property, the company will need to consider how the activities for sale can be packaged.

What can be done pre-sale?

This could be addressed in a number of ways, from simply selling assets to the shareholders, to carrying out a group reorganisation to separate those parts of the business the shareholders wish to sell. It’s important to note that a demerger or other group reorganisations are both relatively involved processes and therefore may require detailed tax analysis, clearance approvals from HMRC and significant legal input. It’s essential to undertake any pre-sale structuring well in advance of an anticipated sale, if this is the route you want to follow.

4. Inheritance tax (IHT) and estate planning

Normally, trading businesses are exempt from IHT, by qualifying for Business Relief (BR). However, cash proceeds from a sale are immediately susceptible to IHT, which can cause up to 40% of the proceeds to pass straight to HMRC and not family members. On top of this, any funds that do pass outright to the next generations may be at risk of threats such as divorce, bankruptcy or financial vulnerability in the future.

What can be done pre-sale?

  • One option might be to consider gifting some shares directly to family members or children pre-sale to enable them to partake in some of the sales proceeds.
  • It might be appropriate to consider gifting some shares into a discretionary trust prior to a sale. The benefits of doing so are the proceeds in the trust will sit ‘outside’ of anyone’s estate for IHT (subject to any 10-yearly charges) whilst offering a platform for succession for family members with the protection layer of a trust. It may also be possible to benefit from a tax charge at the BADR rate of 10% prior to the sale.
  • Post sale – if cash was realised by shareholders personally, it could be possible to explore the use of a family investment company (FIC) as a tax efficient vehicle to making investments.

If you’re considering a sale at any time in the next few years, it’s important to consider all relevant factors as early as possible. In some cases sales fall through, or unexpected tax charges ‘bite’ where sufficient thought hasn’t gone in to might be a once in a lifetime event.

Given the potential tax complexities, seek advice from our Tax team before considering selling your business, to ensure you’re as tax efficient as possible.