Effective tax planning when selling your IFA business

Selling your business can mean a substantial tax bill, which could lead you to pocket less than half of the purchase price. Effective planning can help minimise your overall tax liabilities, so you must be sure you understand the tax implications before you sign on the dotted line.

The potential to minimise tax liabilities will depend on the way the sale is structured. It may be possible to withdraw capital in tax-efficient ways such as payments into your pension scheme, and it may be possible to defer Capital Gains Tax by reinvesting the proceeds in a qualifying investment.


Your tax responsibilities

The main tax liability is Capital Gains Tax (CGT). This is the tax you’ll pay on the profit from the sale of your business. A simple example is if you sell for £100,000 and you originally bought it for £70,000, your Capital Gains liability will be calculated on £30,000.

You don’t pay CGT on the full amount you make as you have a yearly tax-free allowance, which for 2017-18 is £11,300. Therefore, CGT only applies to profits made above this threshold.

Individuals pay CGT at 10% when their combined income and taxable gains are below the income tax basic rate band upper limit and 20% for gains (or parts of gains) above that limit.


For sellers who are individuals

Sale of shares

It could be more tax-efficient for you to sell shares rather than selling assets.

Entrepreneurs’ relief can also result in considerable tax savings and help reduce your rate of CGT on certain disposals to 10%. There is currently a lifetime limit of £10 million of qualifying gains, so this will cover all but the very largest of disposals. Certain costs can also be deducted when calculating gains, such as the legal fees you’ll need to pay in arranging the sale.

There are a number of conditions that apply to entrepreneurs’ relief:

  • You will need to have owned shares in the company for the previous 12 months
  • The shares you own at the time of the sale must be more than 5% of the voting rights
  • You must have been an employee or officer of the company for the year prior the sale.

Selling as a sole trader and partnerships (including limited liability partnerships)

If you run your business as a sole trader, partnership or, Limited Liability Partnership (LLP) then entrepreneurs’ relief will apply for any assets used for business purposes. The capital gain made by the seller is taxed at 10% up to the lifetime limit of £10 million. The business must have been run for at least one year to qualify and any assets held as investments will not be eligible for entrepreneurs’ relief.

If your business is a partnership, each partner owns a share of the business assets, which means that a partner is liable to CGT on the gain arising on their share of each asset. Entrepreneurs’ relief is available if a partner has owned their share of the assets for at least one year.

Deferred consideration

You may wish to sell your shareholding for cash, but a buyer may offer shares or loan notes or a mix of each. A big advantage if it’s not a cash purchase is that you don’t have any immediate CGT liability, and the gain on the disposal of your shares will be rolled over until you sell them. You may be able to make use of several years’ annual CGT exempt amounts, but in some cases you will lose the benefit of entrepreneurs’ relief. Unless you’re likely to obtain entrepreneurs’ relief on a subsequent sale of any consideration shares, paying tax with the benefit of entrepreneurs’ relief could be an option to consider.

Similarly, if you decide that an ‘earn-out’ in shares or loan notes is better for you, it’s possible to defer your tax liability. However, if you qualify for entrepreneurs’ relief based on your original shares, but not from your new shares, the cost of deferring the tax increases the total amount of that liability.


For corporate sellers

Sale of shares

If you’re a corporate shareholder, you may qualify for the ‘substantial shareholding exemption’. This provides a tax-exempt gain on a sale of shares if they have been held for 12 months, continuously, starting not more than two years before the day the shares are sold.

It is not a chargeable gain for the purposes of corporation tax if you meet the following conditions:

  • The company disposing of the shares has owned a substantial shareholding – usually 10% of the ordinary share capital,
  • The company disposing of the shares is a sole trading company or a member of a trading group – this exemption does not apply to partnerships or individuals, and
  • The company in which the shares are held is also a trading company or a holding company of a trading group.

Sale of assets

It’s important to identify exactly what is being purchased, because from a tax perspective the sale of a business makes up a series of separate asset disposals. Unlike a single disposal in the case of a sale of shares, the tax consequences depend on how the consideration is allocated between the assets.

As a seller you’ll need to consider:

  • The tax implications of selling different types of assets
  • Any tax-relief that is available to reduce your tax liability on the sale
  • Any profit on the sale of goodwill or intangible property will generally be taxed as income for a corporate seller
  • The tax treatment of deferred cash consideration and consideration in the form of shares or loan notes.

Where a corporate company sells assets, it is common for them to be liquidated so they can receive the sale proceeds. However, our recommendation if you’re planning a corporate sale is to take expert taxation advice due to the complex rules relating to the treatment of assets on a liquidation.


Buyers

Following the Summer Budget of 2015, acquirers are no longer able to claim tax-relief on amortisation of goodwill and customer-related intangible assets in their accounts.  Therefore, from a corporation tax position, the acquirer is indifferent to an asset purchase or a share purchase.

Whether you’re considering selling your business or need to move ahead and complete your sale, it’s critical that you plan properly, and get the advice you need. Remember, all companies are different and there are many factors that can affect how much tax you will need to pay.

Tax rules are highly complex. This guide has been developed to help you understand your tax liabilities and is not a substitute for specific taxation advice.

Tax reliefs are dependent upon personal circumstances, and pension and tax rules are subject to change by the government.

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