The sale of a company, or of a significant stake in a company, can be a pivotal and stressful point in the life of a business owner. Cutting edge tax support saves tax, time and worry. There will often be opportunities to make significant savings by ensuring the best use of tax reliefs. Equally important, if undertaken in the wrong way a sale can give rise to unexpected income tax charges (at up to 45%) and other tax charges.
By ensuring that the best approach is adopted – and that all the legal documentation implements that approach correctly – our advice and support can add very significant value.
An example of planning we have implemented
The clients were shareholders in a trading company owned by two individuals – along with some members of their respective families. They were approached by a potential trade purchaser with a headline offer of £7 million. Of the £3.5 million of proceeds due to each of the vendor families, only a little over £1 million could qualify for Business Asset Disposal Relief (BADR – which gives a 10% rate of tax) with the remainder being taxed at 20%.
The purchasers wanted to tie both vendor Directors into employment contracts and some of the consideration was to be deferred and payable subject to conditions.
The tax planning opportunity
In this instance, there was an opportunity to maximise the value of BADR. The relief is subject to a lifetime cap per individual of £1 million. Since other family members were already small minority shareholders and held office within the group, there was an opportunity to transfer shares between shareholders pre-sale to access a number of individual BADR quotas. In one case, to provide some legal protection, a trust arrangement was used.
Some of the deferred consideration could be taxed at higher rates if mot dealt with appropriately. An election was made to tax this up-front (at a 10% rate). An additional arrangement ensured that relief would be available in the event that the deferred element was never paid (or only partially paid).
By reducing the level of the Directors’ salaries (post-sale) to the lowest commercial level, and adding the reduction to the share sale price, income tax could be saved.
The income tax threats arising from special anti-avoidance rules could be eliminated through a pre-sale clearance.
Almost all the proceeds were taxed at only 10%. The tax in respect of the deferred element will be paid early but the payment will be tax-free when received. This ensures that only a 10% rate is incurred and protects against future rises in CGT rates. HMRC were able to confirm that no special income tax charges would be imposed.
The purchasers agreed to pay an additional amount for the shares in return for a reduction in the proposed Directors’ salaries. This reduced the tax rate on the sum concerned from almost 50% (including NI costs) to 10%.
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