Planning To Sell A Business

Planning To Sell A Business

I attended a very interesting seminar recently held by a well known and respected firm of tax specialists. Whilst I do not intend to repeat here in verbatim the content of the seminar, the admittedly simple and perhaps even obvious conclusion drawn was that planning is essential when business owners are intending to exit their businesses. But hand in hand with any intended planning must also go the rather important element of time.

When planning to sell a business, there are many mechanisms and tools available in a planning arsenal. However, equally there are a multitude of different considerations and no two business disposals are ever the same. The use of Entrepreneur’s Relief is an obvious starting point and a simple issue to consider is whether the ownership structure makes full use of this. Entrepreneurs’ Relief (ER), which provides a favourable Capital Gain Tax (CGT) rate of 10% has a lifetime limit of £10m. Business owners with holdings in excess of this limit may be able to consider transferring shares to a spouse. Inter spousal transfers are not treated as a disposal for Capital Gains Tax (CGT) purposes. However, transfers to a non- shareholding spouse would require pre-planning, as individuals must own 5% or more of the voting rights and be an employee or officer of the company for a minimum period of 12 months to qualify for ER. Just one example of planning ahead.

In the case of a family owned business where a married couple are already both shareholders and the £10m limit is not being fully utilised by one, a realignment of shares may be considered. This may be undertaken at any time prior to the ultimate disposal, assuming there is already a greater than 5% holding.

Another planning opportunity exists where shares have been apportioned to infer specific dividend rights. Those with less than 5% would not qualify for ER. However, a simple action may be to introduce a different class of shares. Voting rights and share capital could be amended leaving dividends rights unchanged. However, again such rights must be held for at least 12 months prior.

Discretionary Trusts can be used to hold shares for children above and beyond any current minority holdings. As well as providing obvious Inheritance Tax (IHT) benefits, they can serve other purposes too, such as ensuring children do not benefit (from dividends / voting rights) from the shareholding held within until deemed appropriate by the trustees. They are also particularly attractive in preserving family wealth from greedy former spouses and expensive lawyer fees where any such children may end up in divorce proceedings. However, one downside is that they do not qualify for Entrepreneurs’ Relief. One consideration may be to convert the Discretionary Trust into an Interest in Possession (IIP) Trust, as this will then utilise any residual unused ER of the children.

Other solutions such as holding companies may allow excess gains over the £10m ER limit to be deferred. As is often said, tax deferred is tax saved.

Other more complex solutions may come into play where non family shareholders exist or perhaps where there is staff ownership of shares.

And we haven’t even touched on the post sale considerations of wealth succession planning, Income Tax & IHT planning.

Lots of considerations and lots of interests of various parties to be balanced. Suffice to say, none of these can be considered without the benefit of time and prior planning. The overwhelming moral of this story is the earlier the better. The exit from any business should be planned and strategised with the precision that any successful business owner would run their business on a day to day basis. If you are a business owner looking to discuss your potential exit strategy, please contact Steve Prosser or Tim Warr for a free informal chat.