HR & Management

Tax planning ahead of a business sale

7 min read

18 December 2014

Preparing for an exit needs to take place long before there’s an offer on the table. We spoke to Andrew Westhead, partner in tax at Grant Thornton, about how you can make sure your firm is in the best shape to maximise the return from any exit and what to do when an offer is on the table.

How far in advance should you start planning?

Preparation is key and the earlier you start planning, the better. Ideally, we’d be discussing tax planning strategies with our clients at least a year before the sale takes place.

Even if your thoughts aren’t turning towards a possible exit, it’s important to make sure that your business is in the right shape to be sold in case an offer comes along out of the blue which is simply too good to turn down. 

What do you need to do to prepare a business for sale?

Take the time to make sure you have your basic housekeeping in order. This can often be overlooked, but when that approach comes, the potential purchaser and their advisers will want to really get under the skin of your business. In our experience issues relating to employment taxes, VAT and share schemes can often be uncovered during due diligence creating a major stumbling block for a potential deal, and may result in discussions around ‘price-chipping’. 

That’s why we strongly recommend employment tax and VAT reviews of a business in advance of any sale. It’s always worth making sure your website echoes your business values as well; it may well be the first place a potential purchaser looks.

What options are there for structuring a sale and are they suitable?

I’m afraid this is one of those “how long’s a piece of string” questions. There are various options available and the structuring opportunities available, if they’ve been left until the last second, are likely to depend on the purchaser’s willingness to accommodate tax planning as part of the transaction.

Having said that, one of the common themes we see is the extraction of properties from a company in advance of a sale. Quite often, a company will hold investment properties which the purchaser won’t want to buy as part of the transaction. With enough notice, there’s plenty of tax efficient ways in which this can be achieved but it simply adds another layer of stress to an already stressful situation if the planning is undertaken at the last second.

What can I do to minimise my tax liability?

One fairly straightforward option could be to transfer some shares to your spouse. This can be done relatively easily and generally without any tax consequences. However, what it does allow you to do is access an additional annual exemption for capital gains tax purposes, currently £11,000 per person.

By far the most valuable tax relief when selling your business is entrepreneurs’ relief. The qualifying conditions are usually simple enough. For shares in a company, broadly, the business should be a trading business, you need to hold at least five per cent of the shares and voting rights, and you need to be employed by or be an officer of the company. These conditions all need to have been satisfied at least a year prior to sale – hence the preference for a year’s notice before the sale takes place, as mentioned above.

Anything else?

As mentioned above, where the conditions are satisfied, entrepreneurs’ relief reduces the rate of capital gains tax to 10 per cent on your first £10m. This is where exploring the possibility of transferring shares to your spouse and possibly your children, and ensuring that they meet the various conditions can prove invaluable. The tax saving of £1.8m applies per person, so in the context of a family-owned business, the relief can be several times this number and well worth making the time to plan for now, even if a sale isn’t on the cards yet. 

You could also consider whether there is anything you can do to make sure that your minority shareholders meet the conditions. What if certain shareholders own, say, three per cent or four per cent of the share capital – is there anything you can do to make sure they meet the five per cent criteria? With a 12 month lead time, these options need to be considered, whether or not a potential exit is imminent.

Read more about exiting a business:

What impact could a sale have on my inheritance tax position?

This should be central to your thought process when considering a possible exit. Prior to a sale you will own shares in a company and, provided certain conditions are met, these shares may qualify for a valuable inheritance tax relief known as business property relief. This relief has the ability to remove the entire value of your shares from a 40 per cent charge to inheritance tax on your death. 

However, following a sale these shares are likely to be replaced by cash which will not benefit from this relief and so overnight your inheritance tax exposure will have increased. Again, as part of any pre-sale planning, your mind should be on your future inheritance tax exposure and what planning can be done pre-sale to keep this under control, which in turn maximises the amount of wealth you can pass to the next generation.

What about responsibilities or liabilities after sale?

The purchaser is likely to ask for a number of warranties and indemnities as part of the sale process. We’d therefore always recommend that legal advice is taken from the start of any deal – that way you will make sure your interests are protected.