Structuring your business in an efficient manner can result in considerable tax savings on an eventual sale (particularly if addressed more than 12 months before any potential transaction). This guide briefly identifies main points to consider.
If, having considered this guide, you would like to know more or to discuss you own circumstances in greater detail, please speak to your usual contact at Stevens & Bolton or a contact listed on this page.
ENTREPRENEURS’ RELIEF ("ER")
Where ER is available, the rate of capital gains tax ("CGT") payable reduces to 10% (a significant saving on the main CGT rate of 28% payable by higher rate taxpayers). There are various statutory criteria that must be met in order for ER to apply and therefore these criteria should be carefully checked and monitored from time to time.
In particular, it is worth checking:
- the size of your shareholding (this must be at least 5% of the ordinary share capital by nominal value);
- that you are an employee or director of the company or a member of its group; and
- that the company is "trading" for tax purposes, i.e. the company (or group if appropriate) is carrying on trading activities which do not include to a "substantial" extent (interpreted by HMRC as being no more than 20%) activities other than trading activities (e.g. the holding of shares or property as investments).
In addition, it is worth considering whether other family members might also qualify for ER in their own right (e.g. transferring shares to employed spouses). Trusts which hold shares in a trading company can also benefit from ER provided that the life tenant of the relevant trust meets the various conditions (shareholding and employment/directorship) in their personal capacity.
Equity incentives can offer significant tax advantages and align the interests of managers and shareholders helping to maximise performance and price as a sale approaches. In particular, Enterprise Management Incentives are very flexible, tax efficient awards and, where granted more than 12 months prior to a sale, can achieve an overall tax rate of only 10%. For further detail see our guides "EMI options – overview of conditions and tax treatment" and "Comparison of alternative employee share incentive structures for SMEs".
In addition, the exercise of options often results in the employing company obtaining a valuable corporation tax deduction which a purchaser may be willing to pay for. The impact of equity incentives should be borne in mind in negotiating the pricing of any deal.
GIFTS TO FAMILY MEMBERS
Assuming that the company meets the trading test outlined above, it is generally possible to gift shares to family members whilst deferring the gain arising on the gift. Such gifts can therefore maximise family members’ (often unused) CGT allowances and potentially lower tax rates (basic rate taxpayers currently pay CGT at 18% compared to the 28% rate for higher rate taxpayers). Such gifts also remove value from your estate for inheritance tax purposes (provided you survive the gift by 7 years).
GIFTS TO TRUSTS
Whilst you own shares in a private trading company, it is generally possible (subject to some exceptions) to transfer those shares into trust without any inheritance tax or CGT charges arising irrespective of the value of the shares. This can be particularly efficient as it can remove a significant amount of value from your estate whilst allowing you to retain control as to how and when your family benefit from the trust.
REVERSE DUE DILIGENCE
Undertaking "reverse due-diligence" of your company’s tax affairs before sale (such as ensuring all compliance is up to date and correct and all enquiries are closed) is important. Doing this will identify any issues early on and provide you with the ability to rectify these prior to entering a sale process.
Tax input into the structure of the deal ideally before heads of terms is recommended and often reduces the ultimate tax leakage suffered from proceeds.
The information contained in this guide is intended to be a general introductory summary of the subject matters covered only. It does not purport to be exhaustive, or to provide legal advice, and should not be used as a substitute for such advice.
© Stevens & Bolton LLP June 2015