Selling your Company

If you’re selling your company, then the amount of tax you pay can make a significant difference to the money you have in your back pocket to spend or reinvest.

Mitigating and understanding your tax position is therefore vital and this article includes some areas where a difference can be made:-

Should you sell the Trade and Assets or the company?

This is an important first step in deciding and agreeing with the buyer what will be sold.

Quite often as a vendor you will prefer to sell the shares in the company as there is only one level of tax in doing so.

When you sell the trade and assets, there are two levels of tax to consider if you want the proceeds in your back pocket.  However, a trade and assets sale can sometimes be the only practical way of selling of you have other valuable assets in the company that you want to retain.

Tip – On occasion, it may be possible to demerge any assets you want to keep before selling the trading company

Will I Qualify for 10% Tax?

A 10% tax rate is available (on the first £1m of lifetime gains) if you sell shares in your company to someone else.

The 10% rate is available through Business Asset Disposal Relief (BADR).  To qualify :-

– you must have had at least 5% of the shares

-you must have been a director or employee; and

– the company must have been ‘trading’..

for at least the previous two years.

There are pitfalls waiting, so care is imperative here.

Complexity with Earn-Outs

This is where things could get tax tricky.

If an earnout is successful, then the potential range of tax payable is between 10% and 48.25%, which is a huge range.

If we structure the earnout with thought then you will have more chance of getting closer to the lower end of that range.  Every case is different and also of importance is establishing whether it is possible (and beneficial) to defer payment of tax on an earn-out right until any monies are received.

Loans in and out of the Company

If loans are owned by you to the company, then it should be possible for these to be settled in a tax effective way, if a strategy is agreed with the Buyer.

Other areas to consider are the tax warranties and tax indemnity that the Buyer may ask you to sign, especially if you are selling the company.  Sometimes these can be overly onerous and it can be helpful to have some to assist who understands the workings of tax therefore whether the warranty is necessary.

The term ‘Family Investment Company’ provides connotations of a special type of company.

Actually, it’s just a normal company which is owned by different family members with the purpose of investing (rather than a trade).

It can invest in anything which is legal, but typically that will be property (commercial, residential or holiday lets) and stocks, shares, and equity funds etc.

Tax Objectives 

Companies tend to be taxed at lower rates than individuals who have already used up their basic rate bands of income tax through their normal earnings.

That is why companies are utilised as vehicles for investment, because any investment gains/profits/interest are taxed at relatively low rates, meaning that there is more cash to reinvest (their investments roll-up quicker than individuals’).

Two further key tax points around FICS are:

• Shares in a FIC will always be subject to IHT on death (which might not be the case for a trading company). Therefore, consideration around their shareholding is a vital part of the establishment and ongoing management of a FIC
• Taking money out of the FIC for personal expenditure is likely to create further tax, so this needs to be managed

Shareholdings 

Shares in companies have three elements to their rights: –

1. Voting Power
2. Rights to dividends
3. Rights to capital on a sale or winding up

Shares issued to individual family members can have have differing rights.  For example, a more senior member of the family may require voting rights (to provide the company with direction) but they may not need capital because they wish for the value in the equity to pass down to further generations.  Furthermore, if the shares in a senior family member do not have rights to capital then these shares have less value than full shares and so harbour a smaller IHT exposure.

So the conundrum here is to establish the shareholding of the company in a way that allows IHT mitigation but also the possibility of income.  It should also be borne in mind that an individual may be due a wage for services they provide to the company, and in such a case they may not need a right to dividend.

A key trap to avoid is capital gains tax.  If equity with material value is passed down the generations then this can create a CGT exposure.

Profits developed by a successful business are often reinvested into working capital to continue its growth.

Company owners may also make a decision to capitalise some profit for the longer term, by investing it in tangible fixed assets (plant & machinery property) or acquiring other businesses.  Acquiring capital assets of this nature may also help the business growth or it could be seen as a way of securing its base and increasing profitability in the mid to long term.

If material capital assets are acquired then they are valuable to the company and its shareholders and it is wise to be pro-active in protecting their ownership and value.

The use of a holding company is a relatively straight forward way of protecting a business’ fixed capital base.

Property, plant and machinery and ownership of other businesses can be distributed to a holding company from the existing trading company, so that creditors of the trade can never have a claim over those capital assets.

Our Accufile service takes the stress and hassle out of filing documents and statements with Companies House, allowing you to focus on your business.

Why choose the Accufile service?

Penalties for late filings have been introduced of up to £1500 for private companies and £7500 for public companies.

Officers of companies can also face prosecution if the company is operating but fails to make submissions to Companies House.

The Accufile service takes the hassle out of filing documents with Companies House – we will prepare and submit the relevant documents for you and keep track of upcoming deadlines, helping you and your business to avoid any late filing penalties.

Are YOU looking for a cost effective and seamless tax return service?

Do YOU want a tax EXPERT looking after your tax affairs?

Would YOU like comfort and clarity that your compliance obligations are met, and you will not receive any unexpected penalties.

All our clients’ tax returns are considered in detail by a Chartered Tax Adviser, yet our team is structured to prepare your tax return in an efficient and cost-effective manner.

For a LIMITED TIME we are offering 20% OFF* your first self assessment tax return. To claim YOUR discount, provide your details in the link below, and let us put you on the road to peace of mind.

*Offer open to new clients who sign up by 31 May 2020.

Submitting a tax return may be necessary for a particular tax year (running from 6 April to 5 April) if you:

• Disposed of assets resulting in a capital gain;
• Were self-employed or in a partnership;
• Received untaxed income (such as rental income or dividends);
• Have income of more than £100,000;
• Earn more than £50,000 and you or your partner claim child benefit;
• Claim expenses or reliefs (such as employment expenses or relief for pension contributions);
• Want to utilise tax efficient investments such as Enterprise Investment Schemes (EIS), Seed Enterprise Investment Schemes (SEIS), or Venture Capital Trusts (VCT);
• Have foreign income;
• Receive income from a trust or estate;
• Live or work abroad or
• Are non-domiciled in the UK;

This list is not exhaustive and some exceptions do apply.

Are you a company director?

Then you may have been informed that you are required to submit a tax return, even if you have no tax liability to report.  However, this is not the case, as our blog post on  the updated HMRC guidance  on tax returns for directors can explain in more detail. Having the position of director is not, on it’s own, reason to submit a tax return.