...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.
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).
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
Example 3 - UK resident corporate shareholders of A Ltd
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
Example 5 - UK resident corporate members of the LLP
Note that as an LLP is treated as a partnership for tax purposes, the Substantial Shareholding Exemption does not apply.
Option 1 and 3– Asset sale
The purchaser would acquire the trade and individual assets of A Ltd. This is likely to comprise physical assets on which capital allowances may be claimed (e.g. plant and machinery and premises) and intangible assets which may be amortised (e.g. goodwill, the value of trade contracts), to be offset against a purchasers taxable profits in future periods.
The purchaser should only be required to pay Stamp duty on assets which are not capable of physical delivery, i.e. land and buildings.
Option 2 – Share sale
The purchaser would acquire shares A Ltd. As these are likely to be treated as an investment asset it is unlikely that the purchaser would obtain a tax deduction for the cost of purchase of A Ltd without significant restructuring of both A Ltd and its new parent company. Stamp duty will also be payable by the purchaser (0.5% of the total consideration paid for the shares in A Ltd).
The purchase of shares in A Ltd may also have a number of tax consequences for the taxation of the purchaser’s existing business (s), for example, the increase in the marginal rate of tax of associated companies by the reducing the amount of profits taxed at the small companies’ rate of corporation tax.
Given the potential adverse tax consequences for the purchaser, the price paid for shares in A Ltd may be less than would be paid for the underlying trade and assets.
|Reliefs & exemptions|
The first £1 million of gains that qualify for relief will be charged to Capital Gains Tax at an effective rate of 10 per cent. Gains in excess of £1 million will be charged at the normal 18 per cent rate.
An individual will be able to make claims for relief on more than one occasion, up to a lifetime total of £1 million of gains qualifying for relief.
The relief will apply to gains arising on disposals of the whole or part of a trading business (including professions and vocations, but not including a property letting business other than furnished holiday lettings) that is carried on by the individual, either alone or in partnership. Where a business is not disposed of as a going concern, but simply ceases, relief will be available on gains on assets formerly used in the business and disposed of within three years of the cessation of the business.
The relief will also apply to gains on disposals of shares (and securities) in a trading company (or the holding company of a trading group) provided that the individual making the disposal:
To qualify for Entrepreneurs’ Relief an individual taxpayer has to meet all the qualifying conditions for a period of one year ending with the disposal of the whole or part of a business or of shares or the date the business ceased.
Substantial shareholdings exemption
In summary, the substantial shareholdings exemption regime provides that a gain on a disposal by a company of shares (or an interest in shares, or certain assets related to shares) will not normally be a chargeable gain provided three conditions are met:
No claim is required - if the conditions for the relief are met a gain is automatically exempt. It is also important to note that where the disposal gives rise to a loss, and the conditions above are met, this would not be an allowable loss.
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