Selling your company in taxing times

If you run your own company, you will be aware that you should have a personal exit strategy. However, the specifics will very much depend on your personal objectives, circumstances and the structure of your company.

Regardless of your chosen exit strategy, the ‘tax man’ will always be involved, and so in sale negotiations and structuring, you will always need to consider your tax position or you risk the deal collapsing.

Capitalising on your gains

If you sell your company for a profit, you will have to pay Capital Gains Tax (CGT) – and from 6th April 2011, the rate of CGT will depend upon an individual’s income tax position. When an individual’s combined taxable income and capital gains do not exceed the basic rate band of £35,000, the capital gains element will be taxed at 18%. However, when the band is exceeded, the CGT rate rises to 28%.

A sigh of relief

However – there is some hope – it may be possible to benefit from tax relief in the form of Entrepreneurs’ Relief (ER), which can reduce your CGT rate to just 10% on the first £10m of qualifying gains.

There are three conditions which must be satisfied in order to qualify for ER:

  • The company must be a pure trading company or have
    insubstantial non-trading activities, and
  • In the 12 months preceding the date of sale:
    • the shareholder must have held at least 5% of the voting rights in ordinary shares, and
    • the shareholder must have been an officer/employee of the company.

If you already qualify, then that’s great news. If you don’t, and you’re planning to sell your shares or company, then you might want to implement some structural changes in your company as soon as possible, however, we appreciate that this is easier to achieve within a family run company.

If your company is particularly valuable, increasing the number of shareholders and/or balancing out the shareholdings can make a significant difference to your personal tax bill. For example, four brothers sharing equally in a £40m gain will pay significantly less tax than a single brother with the whole gain. In this example, the family would immediately be £8.4m better off as a result.

But no trade, no relief

A word of warning! If your company is involved in investment activities, such as property letting, you’re unlikely to qualify for ER as the tax man takes a very tight line with regard to substantial non trading activities (20% of your total trading activities is the HMRC guidance). If this is the case for your company, you may wish to consider hiving off the
investment activities into another company, rather than forgoing your valuable ER.

Nothing is more certain than death and taxes

Having minimised your CGT on the sales of your company, you really don’t want to be caught out by Inheritance Tax (IHT).

On death, a shareholding in an unquoted trading company generally qualifies for ‘Business Property Relief’ (BPR), allowing your estate to receive tax relief on 100% of the value of your shares.  However, this relief does not extend to the cash you have just received from the sale of your shares!

So, the day before your company sale there was no IHT worry, but the day after you could have a significant IHT problem.  For example, if you sell your shares for a net
gain of £1m then your estate could potentially face an increased IHT liability to the tune of £400,000.

BPR is a significant relief that you should look to protect if at all possible.  As with ER, provided that your company is a trading company there should be no problem claiming BPR, although again, be warned, if your company is carrying on investment activities, this could potentially cause you a problem if levels exceed 50% of your total company
activities.

The loss of BPR relief can be partly avoided through some careful IHT planning. For example, you can consider putting your shares into a trust, which means any sale proceeds will fall outside your estate for IHT purposes.

A trust is not the only solution, as it may also be possible to make a ‘Lifetime Transfer’.  Whilst this solution does not remove assets from your estate immediately, it does start the clock ticking down over the next seven years. The risk here is that the clock does not make it all the way to zero, however, you can insure against this risk with a simple life insurance policy.

Navigating your way round the pitfalls

Given the complexity of selling your company, we suggest you seek early professional advice pertinent to your own unique personal and businesses circumstances.

If you would like to find out more about any of the points raised in this article, then please contact Philip Sutton at Duncan Lawrie Private Banking on 020 7201 3048 or psutton@duncanlawrie.com .

Philip Sutton,
Financial Planning
 

Duncan Lawrie
Private Banking, 1 Hobart Place, London, SW1W0HU

T: +44 (0)20 7245 1234 D: +44 (0)20 7201 3048 M: +44 (0)7894 587008
E: psutton@duncanlawrie.com

About Duncan Lawrie

Duncan Lawrie is a private bank with offices in Belgravia, Kent, Bristol and the Isle of Man. Duncan Lawrie was founded in 1971, and as well as banking, offers a comprehensive range of investment, financial planning, tax and fiduciary services, both in the UK and internationally. The bank’s philosophy is founded on prudence and a long-term perspective. Clients include individuals, companies, charities and trusts.
Duncan Lawrie is a wholly owned subsidiary of Camellia Plc. Duncan Lawrie’s origins can be traced back to East India, where in the nineteenth century Walter Duncan and Alexander Lawrie were involved in tea estates. Tea gardens in this region are still run today by the Camellia Group.

 

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