THIS IS THE FIRST INVITED CONTRIBUTOR TO OUR BLOG
Nicola Draper has invited a number of people to contribute to the Blog on the Draper Hinks website. Marc Ovits is a financial adviser with several advanced qualifications and many years experience in the industry. He has submitted the following:-
Selling a business has many financial implications
Selling your business may well be the biggest financial transaction of your life. You will naturally want to maximise your return on sale and a key part of this will be trying to minimise the tax you need to pay. However you also need to consider life after the transaction. For example, how much income will you need in retirement? This article provides an over view of the sorts of issues you should consider when selling a business.
The general structure of a business sale deal
If you are selling only part of a business, you’ll need to consider whether to structure the sale as a transfer of assets or of shares. Special corporation tax treatment applies if a trading company sells shares in another trading company in which it holds a substantial shareholding.
In some business sales, the deal will comprise of cash and/or shares up-front plus a percentage of the deal will be based on the future performance of the business (an “earn-out”). This earn-out provides the buyer with the security that they are getting what you say they are getting in terms of a profitable business.
When you are negotiating a business sale, it is natural to focus on the price you can sell the business for (gross proceeds). However, gross proceeds are only important up to a point. More important is the cash that you actually receive (net proceeds) and in this regard, the biggest impact on the net proceeds will be the amount of tax you need to pay.
A brief overview of the different taxes that may apply
Entrepreneurs’ relief can allow you to pay a lower rate of capital gains tax (CGT) when you sell your shares in your business. If Entrepreneurs’ relief applies, the rate of CGT is reduced to 10% (as opposed to 18% or 28%). Individuals have a lifetime limit of £10 million of gains for which Entrepreneurs’ relief can be claimed.
Entrepreneurs’ relief can apply to sales of unincorporated businesses or personal trading companies — provided qualifying conditions are met. Given the substantial tax savings involved, it is vital that you organise your business and its sale so that you qualify for Entrepreneurs’ relief.
Other CGT reliefs
Roll-over relief allows CGT to be deferred if the gains are reinvested in new business assets. Provided roll-over relief applies, CGT will only become payable when these new assets are sold.
Hold-over relief can be used to defer CGT if you are giving away your business rather than selling it — for example, handing your business on to your children. CGT is generally automatically deferred on any transfer of assets to your spouse or civil partner.
If you need to incorporate your business as part of the sale process — for example, if you are going to float on AIM or the Main Market of the London Stock Exchange — any capital gains made at the time of forming the company will normally be deferred automatically by incorporation relief. You become liable for CGT when you sell your shares.
Have you thought about the future?
As is evident from the above, maximising your net sale proceeds is usually best done by planning in advance with the assistance of some advice from a tax professional.
Yet the price you receive is only one part of the equation. There are other considerations. How will your sale proceeds be taxed on sale and beyond? How much income will you need in retirement? For these aspects of the transaction, you are likely to benefit from taking advice from a financial adviser. A competent financial adviser will bring a holistic perspective to your current circumstances. In other words, they will help you to consider the wider implications of your transaction. A good example of such planning is the following.
Many trading businesses qualify for Business Property Relief. Business Property Relief (BPR) provides relief from Inheritance Tax (IHT) on the transfer of relevant business assets at a rate of 50% or 100%. This applies to a business or an interest in a business. Relevant property must be held for at least two years in order to qualify for relief. If you sell your business for cash and that cash goes into your estate as opposed to re-investing it in another asset that qualifies for Business Property Relief, your beneficiaries’ potential inheritance tax liability can rise in an instant. Remember that Inheritance tax is charged at a rate of 40% above the nil rate band (currently £325,000 2015/16).
Determinants of Tax Charge
The tax treatment of the proceeds depends on precisely what is being sold, by whom it is being sold and the form of consideration to be received. The first step in tax planning is therefore to identify these components of the transaction. The following points give a brief taster of some of the tax considerations arising on a business sale:
• If the business is trading through a company, is the company to be sold (in which case the shareholders will be making the disposal) or will the company sell the business (in which case the company will make the disposal and the shareholders will then need to consider how best to extract the proceeds from the company)?
• If the proceeds will be paid in cash over a period of time, the gain may nevertheless be taxed immediately on sale, which could present a significant cash-flow problem if the balance of proceeds is skewed towards the future.
• The immediate gain may be deferred if the proceeds are received in shares or loan notes, however entrepreneurs’ relief (which give a 10% rate of tax rather than a 28% rate) may not be available on these elements of the proceeds.
• VAT may need to be charged on the sale of assets. Failure to do so will generally result in the proceeds being treated as received gross of VAT, from which you would need to account for the VAT (possibly without the ability to recover it from the buyer).
• If part of the proceeds is conditional on your employment, it is possible that it will be regarded as employment income rather than a capital gain (with the consequent rates of income tax of up to 45%, plus national insurance).
• If the business uses assets owned personally by the vendor, such as the premises, the sale of those premises may or may not qualify for entrepreneurs’ relief depending on when and to whom they are sold and also the level of rent which has been charged.
There are many aspects to consider when a selling a business. It is therefore important that you give yourself adequate time to consider the options, so that you can evaluate which options will help you achieve your objectives. The benefits of having trusted advisers to help you navigate your way through the minefield that is selling a business cannot be overstated.
I would like to thank Marc Ovits, for his contribution to my Blog. Marc has over twenty year’s financial services experience including eleven years of investment banking experience. He is a qualified financial adviser with several advanced qualifications in Financial, Investment and Retirement planning. If Marc’s email address is firstname.lastname@example.org. If you would like to contact him. Please mention that you got his details from the Draper Hinks blog. If you would like to contact me at Draper Hinks my email address is email@example.com.
Draper Hinks works with accountants that want to sell accountancy fees or buy accountancy fees. We are business brokers for accountants and deal with no other types of business, so if you are thinking of selling your accountancy practice, then please contact us on 01788 816440 or email us at firstname.lastname@example.org