A key concern for many business owners is succession planning for when they wish to partially or fully withdraw from their business.
The options available will often depend upon a number of factors such as the availability of a third party buyer, the business’ infrastructure and the management team.
Third Party Sale
Arguably the simplest solution will be to sell the business to a third party buyer. For company owners this will ideally involve the sale of shares giving rise to a maximum capital gains tax charge of 10 percent if business asset disposal relief is available (subject to the £1 million lifetime allowance for gains).
Quite often the consideration may be paid over a period of time or be dependent upon the business’ future performance but planning may be undertaken to ensure that the exact structure is tax efficient for the seller.
MBO Arrangement
An alternative to the above will often arise if the business has a capable management team to whom the business may be passed. This is often called a Management Buy Out (MBO) and an effective arrangement may be established to enable the management team to acquire the business. A structure can be devised and tailored for different scenarios to enable the sale consideration to be paid to the exiting business owner tax efficiently, often without the need for the MBO team to raise all of the required finance and to then repay this from their personal taxed income.
There are a number of aspects to be considered by both parties including establishing an appropriate vehicle, structuring the consideration and payment terms effectively and liaising with HM Revenue and Customs as appropriate.
Purchase Of Own Shares
A company may purchase its own shares from an individual shareholder whereby they are effectively cancelled so that any remaining shareholders’ interests are increased. As such, this can be an effective strategy if the company has at least one other shareholder who will continue within the business.
Ordinarily a purchase of own shares by a company will be subject to income tax and taxed in a very similar way to a dividend. However, subject to certain conditions, the purchase by the company may be treated as a capital distribution. In these circumstances, the departing shareholder will be subject to capital gains tax in respect of the distribution and can claim business asset disposal relief as appropriate. As with a third party sale detailed above, this may give rise to a maximum capital gains tax charge of ten percent.
As such, the above can be very efficient for the remaining shareholder(s) as the company funds the purchase whilst the departing shareholder will secure a low capital gains tax charge on his disposal.
Freestone Jacobs has vast experience in advising exiting shareholders of the best option for their particular circumstances and then implementing the most appropriate strategy to secure their exit tax efficiently. For more information please contact us.