Selling the family business ― overviewSelling the family business will be a transaction which is commercially driven but can have significant tax implications. The guidance notes in this sub-topic review the tax areas to consider when the business owner is considering selling their business ― these are summarised below with links to more detailed commentary.Pre-sale planningThe owner of the business may have a clear plan on how they intend to realise value from their business and therefore there can be an opportunity to look ahead to ensure the best business structure to accommodate their plans. This could include bringing a spouse or civil partner into the business, separating different trades into different companies, protecting a property by moving it into a holding company or demerging a company between different shareholders. These areas are covered further in the following guidance notes:•Transfer of a trade•Share for share exchange•Demergers ― overview•Reconstructions involving transfer of business•Planning between spouses and civil partnersTrade and assets sale or share saleIf the business is held within a company, there is an option either for the company to sell the trade and assets, or for the shareholders to sell their shares to the person acquiring the business. The tax implications of these options are discussed further in the following guidance notes:•Tax
Succession planning ― employee ownership trusts (EOTs)Where a controlling interest in a trading company is sold to an employee ownership trust (EOT) and the necessary qualifying conditions are met, there are capital gains tax reliefs for the seller and also the ability to pay bonuses free of income of up to £3,600 per year to employees. Therefore, using EOTs for succession planning can allow the owner of a business to pass on the company to the employees of the company for full market value without incurring a CGT charge. This method of sale can provide an alternative to external sales, management buy-outs or private equity backed buy-outs and may be more attractive given the reduction in the maximum amount of business asset disposal relief available from March 2020. This guidance note sets out the method of transferring to an EOT, the tax relief available and looks at some practical issues arising.Detailed commentary on EOTs can be found in the Employee trusts ― implications of disguised remuneration and where are we now? guidance note and in Simon’s Taxes C3.1915.HMRC guidance is set out at CG67800C onwards and the legislation is within TCGA 1992, ss 236H–236U.How does selling to an EOT work?In summary, a qualifying EOT is set up with a trustee and the shareholders in the trading company sell more than 50% of the current share capital to the EOT under a share purchase agreement for
TakeoversWhen one company acquires control of another company, this is called a takeover. This guidance note considers the capital gains tax (CGT) implications for shareholders of the company being taken over.The consideration paid by a purchasing company to the shareholder(s) for their shares in a target company could be either:•wholly in cash•new securities in the vendor in exchange for shares in the target company (a ‘share-for-share exchange’), or•a mixture of cash plus new securitiesCash considerationA chargeable gain or allowable loss will arise if all or part of the consideration given to the vendor on a takeover involves cash.Wholly in cashIf the old shares are exchanged for cash, this is a disposal of all of the original shares and a gain or loss will arise. This is calculated in the normal way using the share matching rules. For guidance on calculating the gain on share disposals, see the Disposal of shares ― individuals guidance note.Cash plus new securitiesIf the old shares are exchanged for a mixture of new securities plus cash, this is a part disposal for CGT. A gain or loss will arise on the cash element, but not on the securities element (as long as the share-for-share rules are not disapplied, see below). Wherever a part disposal arises, the allowable cost that can be deducted from the cash proceeds is calculated by using the formula:Where:‘A’ is the cash received on the takeover‘B’ is the market value of the new securities received'MV82'
Tax implications of share saleWhen a company is disposed of by way of a sale of its shares, its ‘history’ including its tax history is transferred along with the shares. The due diligence process aims to identify any contingent or hidden tax, commercial or financial liabilities which may potentially fall on the purchaser in the future. If the tax due diligence uncovers material potential tax risks or liabilities, this may lead to:•negotiation of specific warranties or indemnities relating to the potential tax exposure in question in the sale and purchase agreement•a reduction in the price payable for the shares, or•a change to the structure of the deal to work around the potential issueIn a worst-case scenario where the potential tax liability is very large in the context of the transaction in question and outweighs the commercial benefits, the deal may even be aborted.A company’s tax ‘attributes’ may also be transferred. These attributes may include, for example, carried forward losses and capital allowances pools that are subject to anti-avoidance rules (considered further below). For further details about the due diligence process, see the Due diligence guidance note.Companies may restructure prior to a sale by hiving down the trade and assets to be transferred into a new company so that liabilities (which may not be related to tax) are left behind in the existing company and hence not transferred to the purchaser. For guidance on the transfer of trade and assets between connected companies, see the
Land and property ― commonly used terminologyThe following list, while not exhaustive, provides an overview of the meanings of commonly used terms that a business and / or its adviser may encounter when dealing with a land and property transaction:TermDefinitionAlienation clauseClause restricting the tenant’s right to assign a lease or sublet a propertyBeneficial occupationThe occupation of land to the benefit or advantage of the occupierBeneficial ownerA party that has title to the land for their own benefitCharge certificateThis is the certificate issued by the Land Registry to the mortgage lender showing the charge on the Land RegistryChargeThis is an interest in land which secures payment of a debtChattelsMoveable personal propertyCompletionThis is the final step which leads to the transfer of ownership of a property. The purchaser receives the title documentation in exchange for payment of the purchase priceCompletion moniesThis is the sum payable to the vendor to complete the purchase of the propertyCompletion statementThis is a statement issued to the buyer showing details of the exact amount that must be paid to complete the purchaseCompulsory registrationWhere legally required in England and Wales, the transfer of land must be registered with the District Land Registry when the transfer is completed. If the land is not currently registered, an application for first title will need to be prepared and submittedContractThis is a legally binding document that must be signed by the seller and purchaser (two copies are normally made). Exchanging the document binds both
Share for share exchangeThis guidance note considers the capital gains tax implications where shares are sold in exchange for new shares.The consideration paid by a purchasing company to the shareholder(s) for their shares in a target company could be in the form of either:•new shares in the purchasing company in exchange for shares in the target company (a 'share for share exchange')•cash•loan notes issued by the purchasing company•a mixture of the aboveThis guidance note covers the tax implications of consideration in the form of shares or a mixture of shares and cash. For details on the tax implications of consideration in the form of loan notes, see the Loan notes and Qualifying Corporate Bonds (QCBs) and non QCBs guidance note.The timing of the consideration also needs to be considered. Consideration may be paid straight away or it may be deferred. Deferred consideration may be fixed or the amount may be variable. For more information on these, see the Tax treatment of earn-outs and deferred consideration guidance note.Share for share exchangeWhere shareholders disposing of their shares receive shares in the acquiring company, CGT is deferred if the acquiring company gets more than 25% of target company’s share capital (or the greater part of the voting power in the target), and the transaction is considered by HMRC to be for commercial reasons and not for tax avoidance. The effect is that the shares received in the acquiring company inherit the original cost and
Loan notes and qualifying corporate bonds (QCBs) and non-QCBsOn the disposal of the shares in a company, a seller may receive loan stock in the acquiring company as consideration or part consideration for the sale. For tax purposes, loan notes are either qualifying corporate bonds (QCBs) or non-QCBs (NQCBs). The expression ‘corporate bond’ is a general commercial term for securities issued by companies to raise debt finance and does not have any special tax significance except in the process of identifying QCBs and non-QCBs. The issue, transfer and redemption of loan notes do not generally give rise to any liability to stamp duty or stamp duty reserve tax.The way in which the loan notes are treated for tax purposes depends on whether the loan notes are classified as QCBs or non-QCBs. HMRC needs to be satisfied that the issue of the loan note is not for the purposes of tax avoidance. Therefore, it is always advisable to seek clearance from HMRC when entering into a transaction involving loan notes. For more information on this, see the Paper for paper treatment clearances guidance note. Much of the commentary below relates to the tax position of the individual investor rather than the company. It is important for company directors and their advisers to understand the tax implications for investors when structuring transactions, as it is often a critical part of the deal. However, the individuals involved must obtain their own tax advice, which takes into account all of their
Business asset disposal relief (previously known as entrepreneurs’ relief)Business asset disposal relief (which may also be referred to as BADR) is a capital gains tax (CGT) relief available to taxpayers who make a qualifying business disposal (essentially selling or giving away their business). For disposals made on or after 11 March 2020, the relief is available on up to £1m of capital gains for each individual over their lifetime, prior to 11 March 2020 the lifetime limit was £10m. Prior to 6 April 2020, business asset disposal relief was known as entrepreneurs’ relief. Strictly, any reference to the relief before 6 April 2020 in the commentary below should use the term entrepreneurs’ relief, however to avoid confusion, the term business asset disposal relief has been used throughout. Business asset disposal relief is a key relief in many business scenarios. To read about it in the context of some common types of transactions, see the following guidance notes:•Rollover relief•Business asset gift relief ― restrictions•Capital gains tax implications of incorporation•Tax implications of share sale•Tax implications of trade and asset sale•Takeovers•Loan notes and Qualifying Corporate Bonds (QCBs) and non-QCBs•Tax treatment of earn-outs and deferred consideration•Enterprise investment scheme deferral relief•Informal winding upIn most instances, business asset disposal relief will be available to:•sole traders and partners selling / gifting the whole or part of their businesses (furnished holiday lettings are also included)•company directors and employees holding at least 5% of the ordinary
Tax treatment of earn-outs and deferred considerationThe consideration received by an individual on disposal of their shares in a company will often be simply in the form of cash, payable at the time of the transaction. However, there may also be some form of deferred consideration, which is often used as an incentive to tie key individuals into continuing to work for the business after the disposal for a certain period of time. In such cases the deferred element of the consideration may be quantified at a later date, typically using a formula based on two / three years post-acquisition profits. An arrangement such as this is known as an ‘earn-out’.The way in which the consideration for the sale of shares is structured determines when the capital gains tax liability of the individual falls due. There are special rules allowing the payment of tax in instalments in certain circumstances, which are covered at the end of this guidance note.Most of the commentary in this note relates to the tax position of the individuals involved in a share sale, rather than the companies. It is important that the directors and their advisers understand the tax position of the individuals involved in a transaction as this may impact the way in which the transaction is structured. However, it is recommended that each party involved obtains their own tax advice tailored to their specific circumstances.Date of disposal for CGT ― reminder of basic rulesThe basic rule is that the date of disposal
Summary of company tax matters following an MBOIntroductionSeveral new companies may have been incorporated and / or acquired as a result of a management buy-out (MBO). See the Introduction to management buy-outs (MBO) guidance note for more information on the structure of an MBO. It is important that the directors of the new group are aware of the tax matters which may need to be addressed once the transaction is complete. It is likely that a tax structuring report was issued by the tax advisers involved in the transaction, not only setting out the steps required to implement the structure for the transaction, but also the recommended actions and ongoing tax issues to consider once the MBO has taken place. A due diligence process will also have been carried out and the tax section of the report issued as part of this exercise should be consulted to ascertain whether any other action was recommended.More information on the acquisition process itself can be found in the Buying a company ― summary of key issues guidance note.The members of the MBO team making the investment should ensure that they obtain their own tax advice covering the tax matters affecting them. These matters are not covered here as this note deals with company taxation issues. The following guidance notes set out some of the relevant issues the investors may wish to consider:•Tax treatment of earn-outs and deferred consideration•Conditions for business asset disposal
Discover our 10 Tax Guidance on Deferred consideration
Speed up all aspects of your legal work with tools that help you to work faster and smarter. Win cases, close deals and grow your business–all whilst saving time and reducing risk.
**Free trials are only available to individuals based in the UK. We may terminate this trial at any time or decide not to give a trial, for any reason.
""I like TolleyGuidance because it is easy to navigate and provides the practical assistance, templates and examples which are hard to find in other places.""
Jardine Motors Group
Access all documents on Deferred consideration