Exit strategy
When starting a new business, most people don’t give much thought to its end at this point. However, after a number of years, even a small one-person business may have built up a valuable customer list and a goodwill value. It is therefore important that a business owner should consider how and when they might wish to retire from, sell or pass on their business.
Partner, Christiaan Hansen, looks at various tax efficient exit strategies which business owners could consider.
A business sale
Whether the business is carried on as a sole trader, partnership or limited company, capital gains tax on a disposal of assets or shares will be a major consideration. Subject to any developments following the recent change of government, at present, the first £1m of a gain may be subject to a reduced charge of 10% rather than the normal 20% rate. This business asset disposal relief is subject to strict conditions, so professional advice is recommended.
In certain situations, the purchaser may want to include an earn-out provision, whereby the seller remains involved in the business for a period and part of the sale proceeds is linked to future business performance. But care does need to be taken to avoid that part of the consideration being treated as employment income rather than a capital gain.
Asset sale and liquidation
If there is no purchaser for a business that does, even so, have valuable assets, these could be sold or disposed of as a separate exercise. Capital gains is subject to tax in the hands of the sole trader, partner or company.
If the latter, the funds will then have to be distributed from the company to the shareholders. Double tax charges are a potential issue in these cases.
Employee takeover
A management team may be willing to take over the company and a disposal of shares to an employee ownership trust may be relevant.
Subject to conditions being met, such a share disposal can be made without incurring a CGT liability, although the proceeds may be received over a period paid out of future profits.
Company purchase of own shares
If a company has other shareholders, they may opt to buy the leaver’s shares. Alternatively, if it has enough funds and if it can be shown to be for the benefit of the business, the company may be able to purchase its own shares.
If specific conditions are met by both the company and the shareholder, this will be treated as a capital gain rather than an income receipt.
Children or relatives and IHT
The children or other relatives of the business owner or shareholder may have become involved in running the business and be ready to take over the reins. If this is by a sale of the business or its shares, similar considerations will arise as for a sale to a third party. However, if the takeover happens as a result of death, business and agricultural property is (at present) exempt from inheritance tax (IHT). As usual, this is subject to conditions, but it is a valuable relief.
IN SUMMARY
The potential impact of IHT should be borne in mind if you are selling or disposing of your business or shares as above. The conversion of business assets or shares into cash, while enabling the recipient to pursue other interests or investments, is likely to mean a loss of these IHT reliefs. Steps may need to be taken to mitigate the potentially adverse effect of this.
When looking at the sale of a business, the tax position of the purchaser will often be relevant, and their needs may conflict with those of you as the seller. An element of negotiation may therefore be required to reach a mutually acceptable conclusion.
As you will see, it is important that a business owner should consider how and when they might wish to retire from, sell or pass on their business. But this should not be left until just before a disposal as advance planning is key to maximising the potential tax reliefs available.
We realise things may change in the coming months, however for small businesses these are frequently discussed scenarios. Our team at JRW Hogg & Thorburn would be happy to discuss options with you, please do get in touch.