Introduction:
The thought of selling your business can be both daunting and exciting as it is often the culmination of years of hard work, dedication and investment.
Yet, amidst all the practical planning, excitement and for many the opportunity for financial freedom, the importance and significance of comprehensive tax planning can often be overlooked and if this is the case, the financial cost can be significant.
Effective tax planning, both on a personal and business level is not just a “formality” that can be dealt with once the transaction is concluded, but something that requires attention – often years ahead of the actual transaction.
Personal tax planning
From a personal perspective, proactive tax planning plays a crucial role in mitigating the final tax liability and ensures that sellers retain a larger portion of the proceeds. This strategy includes maximising tax reliefs available including benefiting from lower tax rates (in some cases 0%) or in other cases deferring tax the tax liability into new assets.
Moreover, it is not uncommon for business owners to finalise the form of consideration in a transaction without seeking tax advice first. This often involves agreeing to deferred consideration, and the assumption is made that it will be subject to capital gains tax like the rest of the transaction. However, the reality is more complex and seeking professional tax advice before finalising the form of consideration is strongly recommended due to the intricacies of the tax legislation in this area. Failure to do so could result in much larger tax liabilities than anticipated.
Additionally, business owners may wish to retain certain assets with the company, such as property or cash, or pass on to their children. Achieving this goal tax efficiently often requires time in order to restructure the business to achieve this ahead of the final sale.
Furthermore, as part of the discussions around exit strategy, conversations about inheritance tax (“IHT”) planning also arise. This shift in focus is driven by the fact that the sale of the business transitions the asset from a trading asset, once exempt from IHT, into liquid assets, subject to a hefty 40% IHT liability. By incorporating IHT planning into the sale process, sellers can take proactive steps to mitigate future IHT liabilities.
Business Tax Planning
Simultaneously, prudent business tax planning is indispensable for optimising the company’s tax position leading up to a sale.
For most business sales, this will be effected by way of a share sale and so full due diligence will be required on the company’s books and records by the purchaser, including corporation tax and VAT returns. By ensuring that at least the last two years records are in order and fully understood by the business owners, this will make the sale process much smoother.
In addition, there are always opportunities to manage the company’s tax liability ahead of a sale, for example ensuring that deductible expenses are maximised and utilising the tax credits available, for example capital allowances, patent box relief or research and development tax reliefs.
By strategically structuring transactions, maximising deductible expenses, and utilising available tax credits, businesses can minimse their tax liabilities, thereby enhancing the attractiveness of the enterprise to potential buyers.
Tax planning also offers business owners the opportunity to explore alternative deal structures that may provide a better outcomes. For example, this may be through an asset or stock sale, a merger, sale of shares to a third party or a sale to an employee ownership trust (“EOT”). Careful consideration of the tax implications associated with each option is essential for aligning the transaction structure with the seller’s objectives and maximising overall value.
FAQ
How much tax will I pay on a sale of my business?
This very much depends, but assuming this is a sale of shares in a trading company, capital gains tax would usually be payable at a maximum rate of 20%. If Business Asset Disposal Relief (“BADR”) is available, this can reduce the tax payable to 10% on the first £1m of gains. It is recommended that tax advice is sought at least 2 years before sale in order to ensure that this relief is available and maximised where possible.
If we have a change of government next year, will the tax rates change?
At this stage, we don’t know what will happen to tax rates if we have a change of government at the end of 2024. It is unlikely that capital gains tax rates will reduce, so our best prediction is that they will either stay the same or increase. If you have a sale imminent, it may be worth considering aiming for completion ahead of the election so that there is certainty of tax treatment.
When should I seek tax advice in relation to a sale of my business?
At least two years before sale would be recommended, but otherwise as soon as possible.
Conclusion:
In conclusion, the importance of personal and business tax planning ahead of a potential business sale cannot be overstated. Beyond mere compliance, it represents a strategic opportunity to maximise personal and business returns, minimise risks, and optimise overall value.
As entrepreneurs and business owners embark on the journey of selling their business, integrating tax planning into their broader strategy is not just prudent—it’s essential for realising the full potential of their hard-earned success.
