How to avoid the common tax pitfalls when selling your business

24 October 2018

The disposal of a business should always be driven by the commercial objectives of the buyer and the seller and tax planning should not distract from this.  However, for most business owners, the sale of a business is a once in a lifetime event, therefore ensuring an exit is implemented in the most tax efficient manner is important.  Often tax planning structures require to be put in place prior to a disposal but, without a crystal ball, it is difficult to predict when an exit opportunity will arise.  However, reviewing the existing company structure and shareholding profile should be considered to increase tax efficiencies prior to selling an entrepreneurial company.  

For individual sellers, the availability of Entrepreneur’s Relief (“ER”) is often one of the most important considerations for a seller on the disposal of the business, which allows the first £10m of gains to be taxed at a 10% Capital Gains Tax (“CGT”) rate subject to various conditions.  There are some traps that the unwary can fall into which would result in their shareholding not meeting the sometimes complex conditions attached to ER.

For Corporate sellers, the Substantial Shareholding Exemption (“SSE”) provides an exemption from Corporation Tax on Capital Gains realised on the disposal of shares in trading companies, subject to meeting a number of strict conditions.

Sale price negotiations are often, understandably, the most challenging and time consuming element of the disposal process. The seller, believing strongly in the company’s future growth and profitability capabilities, often unrealistically expect that expectation to be reflected in the sale price. Earn-outs are frequently negotiated, with additional consideration received by the seller where the company achieves certain future performance conditions. Earn-outs give rise to additional CGT implications for the seller, therefore it is fundamental that professional advice is sought regarding earn-out structuring to ensure future additional gains are not triggered before the earn-out period concludes.    

Although easy to overlook, considering the acquirer’s perspective during tax structuring activities can further maximise proceeds upon an eventual sale. For example, a highly skilled and experienced management team who will ensure continuity of operations during the transition stage will be critical to the acquirer - implementing tax efficient share schemes can therefore assist towards incentivising and retaining such key employees. Timing implications towards implementation of such schemes is crucial however, therefore consideration should not be delayed.  

What is certain is that it is never too early to consider tax planning structures where a future company disposal is envisioned. Advance planning can not only increase a company’s valuation, but from the seller’s perspective, minimise tax leakage against disposal proceeds. Engaging with a professional advisor to conduct pre-sale health diligence checks can help identify and advise upon tax efficient structuring solutions, assisting achievement of the ultimate goal to maximise post-tax proceeds.

For more information please contact Kevin Meaney (kevin.meaney@aab.uk) or your usual AAB contact.

To find out more about Kevin and the Corporate Tax team, click here.

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