Planning to sell your business is not a process for the faint hearted. You have likely spent many years building your business and the last thing you want to face is losing a large proportion of the sales proceeds to tax or worse, being unable to enforce payment of what is due to you because of contractual difficulties.
This is a complex subject. There are many ways to structure a sale and this article outlines a few of the issues you will need to deal with:
- Are you selling all your business or just part of it?
- Are you selling the shares in the company or the underlying business?
- Are you retaining ownership of property that forms part of the business assets?
- Is your company considered to be a “trading” company for tax purposes?
- Should key staff benefit from the sale?
The forth item on this list is particularly important if shareholders want to benefit from Entrepreneurs’ Relief for Capital Gains Tax (CGT) purposes. A successful claim would limit any CGT to 10% of the taxable gain up to a lifetime allowance of £10m.
To be considered a trading concern, a company needs to comply with HMRC’s 80:20 rule. This looks at three criteria:
- Are at least 80% of the assets used for the purposes of a trade?
- Is more than 80% of turnover derived from trading activities?
- Do officers and employees of the company spend 80% or more of their time on trading activities?
Assets can include cash reserves so it may be prudent to extract surplus cash from the company at least a year before a sale is anticipated. However, HMRC tend to take a more relaxed view if the cash arises from accumulated trading profits and it is not actively managed.
Another issue you should consider at an early date is due diligence. Your purchaser will no doubt send in their advisors to check over certain aspects of the business tax affairs prior to the completion of the sale. You should conduct your own review into PAYE, VAT and Corporation Tax compliance matters before any due diligence takes place to ensure there are no skeletons in the cupboard.
Also, it is important to consider shareholdings etc, and whether the shareholders themselves meet the requirements for Entrepreneurs’ Relief.
The key to maximising the value locked up in your business is to take planning seriously, and start the process at least a year before you intend to sell.