An MBO arrangement is a common vehicle used to pass a company over to its management team or, quite often, other family members working within the business.
In general terms, an MBO arrangement will involve the incorporation of a new company as a vehicle to acquire shares from the exiting shareholder. Depending upon the exact circumstances and requirements, the exiting shareholder can hold shares in the new company and this can quite often be useful during a transitional period.
The disposal of shares by the shareholder to the new company will be a disposal for capital gains tax purposes. If structured carefully, this can secure business asset disposal relief (and thus a maximum tax rate of 10 percent on gains up to £1 million) even if the proceeds are payable over a period of time.
The benefit of the arrangement for the incoming shareholders is that they will not have to fund the purchase of shares personally from taxed income or secure personal finance.
The new company will generally own all of the shares in the trading company and therefore dividends can be paid to it without any tax implications. These can then be applied to pay the sale consideration to the exiting shareholder.
There are a number of factors to take into account in order to devise the most appropriate structure for the companies moving forward, the sale of shares and for the various individuals’ future tax positions.
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