Get The Right Tax Advice for Your Business Exit
Author: LHP Director Eirian Humphreys, Exit Planning Specialist
An exit from your business can take many forms, ranging from an orderly closure of the company, a trade sale to a third party, a management buyout, through to putting the company into employee ownership. Our team of corporate finance and tax specialists at LHP can advise you on what best suits your aims and help you plan for a successful transition including best tax advice.
The bigger picture
The day-to-day challenges of setting up and then running and growing a business is a juggling act and it may not be on the top of your list to be thinking about your next move. A word of warning however, an exit strategy ought to be part of every business plan.
Don’t miss a trick by overlooking exit planning until you are ready to sell. If you think you are likely to sell up in a few years, early planning means you can move quickly and potentially increase the sale value. It’s all about making the most of what you are selling and maximising your business’ value to make it attractive to buyers. Paperwork needs to be in order for an information memorandum and a smooth due diligence process to avoid haggling. This guide talks you through some of the key tax considerations when planning for an exit.
The right timing is key when it comes to an exit business and something we have experience of at LHP in getting right and dependent on factors such as the individual’s desires, what’s the current state of the business and then the environment we are currently in. The timing, valuation, tax considerations, staff implications, future plans for the company going forward and then the emotional ties to the company all need working on.
Sometimes we advise to change the timing and work more on the company to get the best outcome. Often it is the case that they might need to wait another two or three years. Or perhaps it is better that the founder steps down when they might prefer to stay longer. It is particularly challenging with the pandemic, businesses have had to take stock and re-evaluate their plans. And any future crash in the market post Covid plus Brexit impact are other factors to be considered. Maybe you are now in a quandary as to whether you can afford to retire from your company since recent events. Sometimes even delaying by as little as 6-12 months can help with your exit finances. Whatever the situation, LHP always has best interests at heart.
Developing an Exit Plan
A plan keeps you focused and in control and will help you prepare for upcoming negotiations and in a better position to capitalise in the marketplace. A plan will help to protect your loyal employees – to protect and reward those employees who have been key in your success and reduce stress around these matters.
Getting advice on tax for your exit
Many businesses planning exits need to become leaner, more efficient, embrace digital transformation and polish the appeal of the company. There are lots of things you can do even when the company is not profiting so much, that can return profit by reducing overheads and making your time spent more efficient. These are all things we can advise on. In terms of the tax considerations there is also quite a lot to consider.
It is advisable that you discuss plans with your accountant well ahead of any target exit dates, typically looking forward a few years or more. This will then ensure that you have sufficient enough time to address any tax issues that may arise on exit and also ensure that the business you are looking to sell is presented in its best possible light.
Pre-transaction planning that should be considered includes (but is not limited to):
- Ensuring any non-core business assets (e.g. personal properties) are removed out of the business pre-sale;
- Any trades that the vendor wishes to retain are demerged into a separate entity in advance of any exit;
- Key business assets such as trading premises or intellectual property held out of the company you wish to sell are transferred into that company in advance of sale.
Planning ahead should enable you to achieve any pre-transaction restructuring in the most tax efficient way. In addition, any legacy tax issues such as open HMRC enquiries in the company should also be resolved prior to a sale, in order to achieve the best sale price and simplify the financial due diligence process.
Selling a business is like selling property, tidying up, problems that need to be fixed and the best sales potential reached via good presentation. Tax efficiency is optimised if you think ahead and give your tax planner some time to develop some advisable measures for you to adopt.
Optimising the vendor’s tax position
When selling your business an early review of your position should be undertaken to understand if you qualify for ‘Business Asset Disposal Relief’, as this will offer a lower rate of Capital Gains Tax if you do qualify.
Business Asset Disposal Relief, when applicable means capital gains arising from a sale may be taxed at a lower rate of 10% up to a lifetime limit of £1m, rather than 20% for gains falling within higher or additional rate tax bands.
To qualify for Business Asset Disposal relief on a disposal of shares, the shares would need to be that of a trading company (or holding company of a trading group), you would need to hold at least 5% of the votes and shares for a 24 month period and you would also need to have been an officer or employee of the company for that same period.
If on a review of the shareholders qualifying status, the conditions are not satisfied, provided this is done well in advance of the transaction it may be possible to change the commercial position such that the Business Asset Disposal relief conditions are met going forward. This would need to be undertaken more than 2 years prior to a sale however.
A potential problem associated with disposals is the risk that proceeds (or an element of proceeds) may be subject to Income Tax of up to 45%, as opposed to taxed under the capital gains regime at 20% or 10%.
Some risks areas arising in respect of a disposal relating to Income Tax are:
- The seller who remains involved and helps out in the business should be paid a salary for the work they do post-sale. Failure to do this can results in a proportion of the proceeds received for the shares becoming subject to Income Tax rather than Capital Gains Tax. Market rate salaries are advisable for any duties post sale.
- When multiple shareholders sell a company but don’t receive proceeds proportionate to their shareholdings, HMRC can assert that part of the excess proceeds payable to one or more shareholders is in reality a payment for something else (other than the shares) such as services provided or restrictive covenant.
- If a shareholder retains material interest in a company’s shares but receives a sum of money – HMRC might consider that the cash is a distribution of profits and thus taxable as a dividend.
- It is usually recommended an owner seeks HMRC clearance in relation to this.
- Deferred cash payments or continued shares can make for tax complications – for example an ‘earn out’ that depends on future performance. Seek expert advice on how you might defer tax relating to the non-cash element of a sale and to form an understanding on how you will fare once the shares are sold or loan notes are redeemed.
HMRC requires that certain conditions are met to defer the tax on non-cash considerations and clearance is recommended to rule out any tax avoidance motive. HMRC has 30 days to respond to a clearance application, however we have experienced delays in obtaining HMRC clearance during recent times. The tax deferment interacts with your ability to claim Business Asset Disposal relief in many cases and often there is a need to choose between paying 10% tax now or up to 20% in the future, based on current rates and current legislation which is of course at risk of changing. The Office of Tax Simplification has been instructed by the Government to review Capital Gains Tax in its entirety and therefore may change in future.
Capital Gains Tax (CGT)
CGT thresholds have been frozen until 2026. This applies also to business disposals – so there is plenty of time before thinking about the impact of any increased tax incurred from a sale.
Any the wiser?
Whatever stage you are in the exit lifecycle, having an expert advisor by your side will ensure you properly understand your choices and negotiate the best outcome for you, your loved ones and your company. At LHP we are here to help you remain focused on your daily operations and maximise the value of your business during what can be a long sale process. We have the experience to help you prepare your business for future sale and help you perform better today.
At LHP, we endeavour to help your business during all stages of the exit life cycle. Let us take the pain out of the long and complicated task of exiting a business as we do for many other businesses. Call us on 01267 237534 or email firstname.lastname@example.org.