Jennifer Adams considers some tax planning strategies for the retirement of a business owner.
Geoffrey Chaucer is credited with the proverb “All good things must come to an end”; so it is with the ownership of any business.
A tax-efficient disposal method depends on the type of business and whether continuation or cessation is planned. Should no family member be willing or able to take over the reins, the business must be disposed of in another way. The most straightforward and final method is to retire and close the business. However, the business owner may be lucky and find another business wanting to merge or take over.
Sole trader or partnership share
Apart from submitting final tax returns and paying the tax bills, on the disposal of a sole trader business or partnership share, capital gains tax (CGT) may be payable on the sale of any assets (e.g., land and buildings, intangible assets such as goodwill and trademarks), calculated separately on each chargeable asset sold.
Any overlap relief available from the early years of the business can be utilised. The normal regime of writing down allowances or first-year allowances does not apply on the closure of a business; instead, the taxpayer is given a balancing allowance or charged a balancing charge in the final period of trading. With a partnership, the partnership itself will continue with any assets usually taken over by the other members.
Company
The four methods of selling a company are:
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share sale;
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asset sale;
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management buyout (MBO): where the management team buys a majority stake in the company; and
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merger with or takeover by another company.
There may be conflicting interests in any share sale as the seller will be looking to sell the shares due to the favourable tax treatment under business asset disposal relief, should the conditions apply (potentially reducing the tax charge to 10% of the gain realised) and to avoid a potential double tax charge, the first charge being on any asset sale, and personally when the cash is withdrawn from the company.
Conversely, the buyer may prefer to purchase assets only to claim capital allowances and avoid acquiring any previous liabilities of the company, which could be the situation with a share acquisition. The CGT position will depend on the form of consideration and whether that consideration is deferred or under an earn-out agreement. Stamp duty will be due on the market value of the shares, which may be lower than the stamp duty land tax liability on assets should land or buildings be transferred.
Management buyouts
The majority of MBOs are undertaken in one of the following forms:
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The MBO team acquire the seller's shares in the company.
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The MBO team form a company (NewCo), which acquires the seller's shares in the company.
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The MBO team forms NewCo, which buys the assets only (this method is possible whether buying a limited company or an unincorporated business).
Given the power balance between the sellers and the MBO team, the usual MBO involves the purchase of shares.
Merger or takeover
Unless the consideration is entirely in cash, the shares in the old company are replaced with shares, securities or debentures in the new company. If the company taking over issues shares only, no CGT is payable if certain conditions are met – one of which is that the reorganisation applies equally to all holders of the class of shares being reorganised. When the new shares are subsequently sold or disposed of, they are treated as though the purchasing company bought them at the same time and cost as the original shares (under rollover relief).
CGT will be payable by the selling shareholder if the transaction is greater than £3,000 in cash or 5% of the value of the shares, valued just prior to takeover.
Practical tip
All business plans should include a section headed 'Developing a plan for succession or closure'. Even if the intention is to close the business completely, this section needs to detail how to do so with a focus on strategic tax planning. If the intention is to keep the business going, the impact of tax on the different methods can have a significant effect on the decision.
