A brief tax guide to buying and selling family and owner-managed companies
If you are thinking of selling your business or thinking of buying one, please do get tax advice at the outset. Of course commercial considerations are paramount, but once you have decided in principle upon making a move to sell, or a move to buy and started looking at the numbers, do take into account that those numbers may be affected in a major way by tax considerations.
Selling the owner managed company
In most circumstances a small owner-managed business is best sold as a whole. In other words, sell the shares in the company to the new owners and then they will take on the business, the obligations including tax liabilities and the employees lock, stock and barrel. Of course the purchaser will do their due diligence and there will be safeguards for the buyer, the seller and the employees.
The advantage is that upon the seller(s) receiving the proceeds of sale in cash, there is only a capital gains tax liability to worry about. In most cases Entrepreneur’s Relief will limit tax to10% of the gain on sale up to £5M with the balance of any gain taxable at 28%. This is very tax-efficient.
Only in particular circumstances which I will come back to will a share sale not be very advantageous in selling the business.
Buying a company in business
Purchasers of a business usually see matters differently. They would often wish to purchase the assets rather than the company. The assets will be revalued for tax purposes so they will take on real property at a higher cost and therefore lower gain on later disposal. They will acquire plant and machinery at current value and be able to write it off over several years. Of course they will have to pay for the goodwill of the selling business but at the same time they are buying in future tax allowances.
The buyer’s advantage is the seller’s disadvantage
If a company sells its assets rather then the owner(s) just selling their shares, the company realises gains on its property upon which it will have to pay corporation tax. It may have taken advantage of generous Annual Investment Allowances and have written down plant and machinery assets to nothing which might have cost up to £150,000 or so over the last couple of years. There may be many assets which would be revalued on sale and a lot of corporation tax would have to be paid back.
All-in-all the asset purchase route is great for the buyer, but the seller would have to suffer quite a lot of corporation tax before liquidating the company and (by HMRC concession) being allowed to liquidate the company and pay capital gains tax with Entrepreneur’s Relief. Although the capital gains tax on liquidation might be restricted to only 10% it might be on a lesser amount after the company has met its corporation tax liabilities. The effective tax rate for the seller might easily be in the mid thirty-per-cents though the buyer would be happy.
Exception to the seller’s rule
The selling company may have been trading at a loss for a year or so. If that is the case (and we may be talking about a fire sale of a failing business) then even if the assets out of the company to the buyer, the losses brought forward may cancel out the profits on revaluing the assets prior to sale, thus leaving more in the pockets of the selling company’s owner.
To sum up…
- In general the selling owner will wish to dispose of all the shares in the company to the new owner.
- Usually only a loss-making company will be very willing to go the asset-sale route.
- The buyer will wish to purchase the assets and business but not the company.
It makes sense that if the buyer insists on an asset purchase that is unhelpful to the seller from the point of view of incurring extra corporation tax, the seller should look for a higher price in at least part compensation. It should be part of the negotiation.
I am sure you can see that the time to get tax advice is at the outset, well before any draft agreement is drawn up between the seller and the buyer.
Why not find out how we can help with your difficult tax issues? Call on 0845 456 3583 or email enquiries(at)jonstow.com for an early appointment?