Business Disposal

The structure of a sale is vital to securing lower tax rates both on the initial consideration and any deferred consideration arrangements.

As an example, it may be that the buyer wants to keep you on board for a period to secure a smooth transition and therefore an element of the proceeds are in the form of an Earn-Out linked to the future performance of the business. If not structured correctly, you could face hefty tax charges on day one but not receive the full value, or HM Revenue & Customs could seek to charge income tax on this by linking it to your ongoing services.  

Structuring both the form of the sale and the consideration is therefore paramount in securing the most efficient tax position.

The management team (which may include the next generation) may be the right choice when it comes to owning the business going forward. However, you will of course want to ensure you get your value.

Often, management teams do not have the funds and are not able to secure the funding to pay for the business in full. A carefully structured management buy-out can allow the consideration due to you to be funded by the business over a deferred period (dependant upon affordability), whilst still allowing you to benefit from lower Capital Gains Tax rates.

Anti-avoidance rules mean that in many circumstances in which cash is extracted from a business in a capital form (such as on a management buy-out) can instead be assessed to higher Income Tax rates. With careful planning, this can be avoided, and often HM Revenue & Customs clearance is secured to ensure your tax position is protected.

It may be that employee ownership is the best option for both your exit and the business.

One tax-efficient route to employee ownership is the sale of a controlling interest to an EOT. If structured correctly, you could pay no tax at all on the proceeds and other tax benefits can accrue to employees, such as tax-free annual bonuses of up to £3,600 each.

Businesses owned by EOT’s usually experience substantial commercial benefits, most notably, increased staff engagement.

This can be financed similarly to a Management Buy-Out being funded by the business.

A sale to an EOT does however require careful planning to ensure the various conditions that apply to secure the tax position are met.

PE buyers are typically investment funds that invest in private companies without a desire to get involved in the day-to-day management of the business (although some internal functions could be centralised). 

This could be a complete sale of the business or a partial sale. It may also be that some loan finance is injected to help fund growth plans to increase the the value of the business for a complete sale in the future.

PE deals are similar in many ways to trade sales, however, they come with their own distinct considerations. For example, on a partial sale, if there is anything less than a controlling interest being sold, HM Revenue & Customs may view this as a guise to get cash at lower Capital Gains Tax rates and therefore seek to charge income tax on any proceeds you receive. With careful planning, this may be avoidable, and JS.Tax Advisory can negotiate this position with HM Revenue & Customs in advance of completion to secure clearance.

Our clients tell us that the added value that this ‘bouncing-off’ advice brings to their decision-making is what makes JS a different kind of accountancy firm. We’re not just providers of accounting and compliance services. We’re a trusted, integral part of your management team.

Many privately held businesses have been passed down from generation to generation.

Often it is possible to do so without creating any tax charges, however, is direct ownership the right decision? Would succession to a family trust be a better option to obtain a level of protection for the business?  

If the company is wholly or mainly an investment company (including property investment), relief is unlikely to apply.

Also, it may be that you want at least some value for your business, particularly if required to fund your lifestyle.  In which case, a management buy-out structure may be the right option (see above) or perhaps a combination of that and gifting the business.

JS.Tax Advisory is absolutely the right team to advise on family successions, having worked with many family businesses across many generations we have developed a real skill and passion for this area.