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Kirk Rice Blog

Business Sale Tax Aspects – What You Need To KnowWritten on November 8, 2018 by Kirk Rice LLP

Business Sale Tax Aspects – What You Need To Know

Whether a business trades as a sole trader, partnership or as a limited company, there are tax considerations that apply when looking to sell. This article gives a summary of the tax aspects you are likely to encounter with your business sale.

Tax Aspects – Sole Traders and Partnerships

The tax considerations for these types of business are relatively straightforward. The owners will most likely be selling tangible assets which have been used or are in use, such as motor vehicles, computers, machinery, and intangible assets such as goodwill, the customer database and perhaps the order book. With regards the business sale proceeds, these would need to be apportioned between all assets in order to calculate the gain on each one. This particularly applies to computers and machinery, which may have been purchased by the business over many years. The tax implications of these will be down to whether the allocated proceeds exceed the cost of those assets which haven’t received a tax deduction in the business.

An early assessment of these assets is critical in the selling process since any taxable profits will be charged income tax at a rate of either 20%, 40% or 45%, depending on the personal circumstances of the taxpayer.

The most likely scenario is where the majority of the business sale proceeds will be the sale of the goodwill, customer list and the order book. Assuming that the proprietor built the business from scratch, whatever is received in this regard will be subject to Capital Gains Tax. A major consideration is to assess whether the proprietor can claim Entrepreneur’s Relief in order to reduce the Capital Gains Tax liability from 20% to 10%.

For further details on tax considerations for sole traders or partnerships, you can visit the HMRC website. Alternatively, sign up to our Key Guide which takes an in-depth look at this topic.

Tax Aspects –  Limited Company

If you are selling a Limited Company, you will have to decide whether to sell the company itself, that is your shareholding, or, the company sells its business and assets. Not surprisingly, what suits the seller doesn’t usually suit the buyer. For example, the seller will no doubt prefer to be paid in cash. However, if the purchaser happens to be another company, they may prefer to offer shares or loan notes rather than cash. Again, if you are the seller of the company you may wish to sell the entire company whereas the purchaser may prefer to buy just the business and assets which is a far simpler arrangement from their point of view. The reason being, that when a purchaser takes over a company, they also take responsibility for the hidden liabilities.

In terms of tax, the most important tax considerations will normally be whether or not Entrepreneur’s Relief is available as this will reduce the Capital Gains Tax liability to just 10%. However, with the higher rate of Capital Gains Tax reduced to 20% from 6th April 2016, the cost of not qualifying for Entrepreneur’s Relief has been considerably reduced.

The tax situation can be particularly complicated if you sell the business and assets out of your company. The company will be liable to Corporation Tax on the gains that arise from the disposal. Furthermore, there will be the added problem of extracting the proceeds which can result in a double tax charge. So, it definitely pays to carefully consider the implications of this option.

Entrepreneurs’ Relief

For Sole Traders and Proprietors, Entrepreneur’s Relief will apply as long as the business has been operational for at least 12 months (24 months from 6 April 2019).

For Limited Companies, there are a number of considerations. Firstly, the company must be trading. If the company has any form of significant investment, then it may jeopardise the Entrepreneur’s Relief claim. Typically, if more than 20% of the company’s activities are considered non-trading, then it may not qualify as a trading company. This is an important aspect to consider as Entrepreneur’s Relief is an ‘all or nothing’ tax relief. However, it may be possible to rectify the situation prior to the business sale if any significant investments do exist.

A further condition is that the seller’s shareholding must be at least 5% (in addition, from 29 October 2018, the selling shareholder must also be entitled to at least 5% of distributable profits and net assets). This shouldn’t cause a problem where only one or two people are involved in the business and, they own all the shares between them. However, where there are a number of shareholders, individual shareholders must have at least 5% of the total shares issued by the company.

If the sale of the company does not qualify for Entrepreneur’s Relief, then gains are taxed at a rate of 10% up to the level of the basic rate tax band, and 20% thereafter.

For further information on Entrepreneur’s Relief please see the HMRC website.

Tax Implications of Earn-out

With an earn-out, part of the business sale proceeds will be deferred, so the seller will not receive the money up-front. The actual amount that the seller ultimately receives will not be known at the time of the sale. Therefore, an Estimated Market Value must be included in the proceed figure which represents the right to receive future payment.

If the amount subsequently received is higher, then the additional proceeds will be treated as a separate disposal. However, even if part of the proceeds are payable later, this amount can be established at the time of the sale by treating it as one disposal. Since Capital Gains Tax will then be payable before some of the proceeds are received, you may be able to pay the tax by instalments.

Tax Implications of Shares or Loan Notes

The majority of sellers would probably prefer to sell their shareholdings for cash. However, the purchasing company may only offer shares or loan notes, or a mixture of both. This represents a riskier form of business sale as securities can fall in value. Furthermore, unquoted shares can be very difficult to sell and there is always the possibility that the purchasing company could fail, ultimately leaving you without a penny.

The decision to accept securities will depend on your bargaining position, and whether the sale price is higher than the price for a cash sale. One major advantage of taking securities is that you will not have any immediate Capital Gains Tax liability. The gains on a disposal through shares will be rolled over until the replacement securities are eventually disposed of. There may be an option to make use of several years’ worth of exemption amounts from Capital Gains Tax but, in some cases, you will lose the benefit of Entrepreneur’s Relief. This aspect needs to be considered.

If you receive securities on the sale of a business run through a Sole Trader or Partnership, this does not in itself defer your Capital Gains Tax liability. However, you could obtain Capital Gains Tax deferral by incorporating your business prior to being sold. This is a consideration if sole traders or partnerships want to take this route.

In summary, there are differing tax considerations which apply when selling a business. These are determined by the type of business you own.

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 STARTING AND SELLING A BUSINESS

Any reader interested in discussing preparing for your business sale, can telephone Graham Jennings on 01344 875 000 in our Ascot office, Tim Neale on 01252 960 500 in our Fleet office or James Moody on 020 8789 8588 in our Putney office. You can also email info@kirkrice.co.uk.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.

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