…and their tax implications are often only considered when a sale is imminent.
Were the correct structure in place at the inception of the business substantial savings can often be made.
To illustrate the impact business structures have on the ultimate tax payable on a sale we have set out below three difference scenarios, from both the vendor and purchaser position. An asset sale by UK limited company, a share sale by the shareholders of a UK limited company and an asset sale by members of a UK limited liability partnership.
Tax rates are for the 2009/2010 tax year and the calculations assume all parties are UK resident and domicile.
Seller’s position
Option 1 – Asset sale by A Ltd
A Ltd would sell its trade and assets to the purchaser. Any profit on sale (for example on goodwill or trading stock) is likely to be chargeable to corporation tax at up to 28%.
A transfer of a business (a ‘transfer of a going concern’) is outside the scope of VAT.
A Ltd’s post tax profit would need to be distributed to the shareholders either as income (a dividend) or as a return of capital (through liquidation of A Ltd).
Example 1
£
Profit on disposal of assets 1,000,000
Corporation tax at 28% (280,000)
Net profit for distribution to A Ltd shareholders 720,000
Individual shareholders are likely to be subject to a further income tax liability equal to 25% of the net dividend distribution. In example 1 this would equate to a further tax liability of £180,000 and net proceeds of £540,000. In may also be possible to structure part of the distribution as a return of capital whereby any gain is taxed at the lower capital gains rate of 18% or 10% for certain business disposals.
Corporate shareholders should not be subject to a UK tax on the receipt of UK dividends. Further tax charges are however likely to arise when these profits are distributed to its shareholders.
Option 2 – Share sale by shareholders of Ltd
The shareholders in A Ltd would sell their interests in the company to the purchaser. Any profit on sale of the shares is likely to be chargeable to either capital gains tax at up to 18%, or corporation tax at up to 28%.
A sale of shares is generally outside the scope of VAT.
Proceeds would be paid directly to A Ltd’s shareholders thereby removing the need to make an income or capital distribution from the company.
Example 2 – UK resident individual shareholders of A Ltd
£
Profit on disposal of shares in A Ltd 1,000,000
Capital gains tax at 10% (assuming Entrepreneurs relief ) (100,000)
Post tax proceeds 900,000
Example 3 – UK resident corporate shareholders of A Ltd
£
Profit on disposal of shares in A Ltd 1,000,000
Corporation tax at 0% (assuming Substantial Shareholding Exemption) (0)
Post tax proceeds 1,000,000
Post tax proceeds received by corporate shareholders of A Ltd are, of course, likely to be subject to further tax liabilities on distribution to their shareholders as detailed in Option 1.
Option 3 – Asset sale by members of LLP
Instead of a corporate body, the investors in A form a Limited Liability Partnership.
The members of the LLP would sell their interest in the trade and assets of the LLP to the purchaser. For individual members, any profit on sale of capital items (for example on goodwill, premises or plant) is likely to be chargeable to capital gains tax at up to 18% and proceeds from stock at up to 41%. For corporate members, any profit on sale of either capital or income items will be subject to corporation tax at up to 28% subject to the level of chargeable profits in the year of sale.
As an LLP is, for tax purposes, treated as any other partnership, any proceeds would be deemed to be paid directly to the members.
Example 4 – UK resident individual members of the LLP
£
Profit on disposal of assets 1,000,000
Capital gains tax at 10% (assuming Entrepreneurs relief ) (100,000)
Post tax proceeds 900,000
Example 5 – UK resident corporate members of the LLP
| £ | |
| Profit on disposal of assets | 1,000,000 |
| Corporation tax at 28% | (280,000) |
| Post tax proceeds | 720,000 |
Note that as an LLP is treated as a partnership for tax purposes, the Substantial Shareholding Exemption does not apply.