Sale of Business to Third Party
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.