If you are thinking of selling your business, different experts will help you through different aspects of the corporate transaction, but it’s easy to overlook the personal financial planning implications involved.
Let’s focus on tax, namely Inheritance Tax (IHT) and Capital Gains Tax (CGT).
CGT is potentially taxable on gains in the value of company shares, when they are disposed of. As many owner-managed companies have minimal value at outset, this often means that on the sale of a company, the taxable gain is most of the sale value.
The government has CGT in its sights. Tax free allowances have been reduced to just £6,000 in the current tax year and £3,000 from 6 April 2024. Fortunately, employee-owned shares in trading companies usually qualify for Business Asset Disposal Relief, which reduces the rate of tax from a maximum of 20% to 10% but only on the first £1 million of gains. Bear in mind that the £1 million limit is an individual, not a company limit, so if the limit is reached on the sale of one company, future sales of other companies would be taxed at the full rate.
CGT is payable by 31 January in the tax year after sale, so for a sale completed 1 April 2024, the tax would be due by 31 January 2025. If the sale completed 6 April 2024 the tax would not be due until 31 January 2026.
Be aware that the full tax liability crystallises on the date the company is sold, even if payment is made in instalments.
There are a number of ways in which CGT can be mitigated, largely by reinvesting some or all of the proceeds into other investments that either allow the gain to be deferred, or which provide income tax relief that can be offset against the tax liability. The seller might decide to pay the tax at 10%, but at higher rates of tax, mitigation may become more relevant.
Your business is likely to be one of your most valuable assets, however shares in most unquoted trading businesses, owned for two years or more, are exempt from IHT. This includes shares quoted on Alternative Investment Market (AIM), but note that some companies e.g. investment companies, don’t qualify for the exemption. The moment the shares are converted to cash, or to shares in a quoted company, their value becomes potentially liable for IHT. For every £1 million of proceeds, assuming personal exemptions have been used by other assets, that’s IHT of £400,000.
In a worst case scenario, this could lead to a company being sold and subject to CGT at 10/20% on the proceeds, with 40% IHT on death, on the net cash proceeds.
As with CGT, there are a number of ways to mitigate the IHT. It is also usually possible to insure the tax liability – this could be a long term solution, or it could be a cost-effective way of insuring the new IHT liability in the short-term whilst working out a longer-term strategy.
The impact of the sale of a business on CGT and IHT should not be ignored and even if the decision is to do nothing and accept the tax as is, this should be a positive decision in full knowledge of the facts. If the seller is looking to mitigate some or all of that tax, there are a variety of different and non-contentious solutions that should be considered.
Getting professional financial planning advice that you can trust is critical to ensuring you receive the best advice for your individual needs.
If you require help selling your business, please speak to a member of our financial planning team on 01223 233331, or email info@mmwealth.co.uk.
Disclaimer
Opinions constitute our judgment as of this date and are subject to change without warning. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.
The information in this article is not intended as an offer or solicitation to buy or sell securities or any other investment, nor does it constitute a personal recommendation.
The Financial Conduct Authority do not regulate tax planning.
The information contained within this blog is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.
