Most business owners spend years building something of real value, and when the time comes to sell, the focus quite naturally falls on achieving the best possible price. Tax is often treated as an afterthought, something to deal with once the deal is done. That’s understandable, but it can be an expensive approach. The tax position on a company sale is rarely fixed, and the earlier you take advice, the more options you have.
The structure of the sale, the timing of the transaction, and decisions made well in advance of any deal can all affect the tax outcome significantly. Our role is to make sure our clients understand what’s available to them and that they’re in the best possible position before they enter any negotiation.
When it comes to WR Partners, I absolutely trust their judgement, and I trust that they are there to help us.
The first and most fundamental question in any company sale is whether it will be structured as a sale of the shares in the company, or a sale of the underlying assets. This matters because the tax treatment for buyer and seller is quite different, and their respective interests don’t always point in the same direction.
For the seller, a share sale is almost always preferable. The proceeds are subject to Capital Gains Tax rather than Corporation Tax, and where Business Asset Disposal Relief (BADR) applies, the effective rate can be as low as 18% on qualifying gains up to the lifetime limit. An asset sale, by contrast, typically results in the company paying Corporation Tax on any gains, with the after-tax proceeds then sitting inside the company, requiring further extraction, and potentially further tax, before they reach the shareholders.
Buyers often prefer an asset purchase because they can step up the base cost of the assets acquired and, in some cases, deduct depreciation for tax purposes. The tension between these positions is a normal part of sale negotiations, and understanding it early helps sellers hold their ground, or negotiate appropriate compensation if an asset sale is ultimately agreed.
The most valuable tax planning on a company sale rarely happens in the final weeks before completion. It happens much earlier, sometimes years before any formal process begins.
Depending on the circumstances, pre-sale planning might involve reviewing the ownership structure to ensure all shareholders qualify for BADR, extracting value from the company in a tax-efficient way before a sale crystallises a higher valuation, considering whether any restructuring is needed to separate trading and non-trading assets, reviewing the position of any employee share scheme participants, or making pension contributions that reduce the effective tax cost of the exit. Where a holding company structure is in place, the interaction between the group structure and the sale mechanics also needs careful thought.
None of this needs to be complicated, but it does need to be considered with enough time to act on it. If you’re beginning to think about an exit, even if it’s still a few years away, that’s the right time to have the conversation.
Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief, reduces the rate of Capital Gains Tax to 18% on qualifying gains, up to a lifetime limit of £1 million per individual. For business owners selling shares in a company they’ve built and run, this relief can represent a very significant saving.
Where there is any uncertainty about whether BADR will be available, it’s worth taking advice well in advance of any transaction. In some cases, steps can be taken to protect eligibility, but only if there’s time to act.
Not all sale proceeds are paid on completion. Many deals include an element of deferred consideration, often structured as an earn-out, where part of the price depends on the business’s future performance. The tax treatment of earn-outs can be complex and depends on how the arrangement is structured, whether the deferred amount is ascertainable at completion, and whether the seller remains involved in the business after the sale.
Where the earn-out is genuinely linked to future performance rather than continued employment, it will typically be treated as a capital receipt and subject to Capital Gains Tax. If it starts to look more like remuneration, particularly where the seller stays on and the earn-out is conditional on continued service, HMRC may argue that part of the proceeds should be taxed as income instead. Getting the structure and documentation right from the outset matters considerably here.
Certain pre-sale transactions will require advance clearance from HMRC to confirm that anti-avoidance provisions won’t apply. This is most commonly needed where a restructuring takes place shortly before a sale, inserting a holding company, for example, or demerging part of the business in advance of a transaction. HMRC will want to understand the commercial rationale and confirm that the steps being taken are genuine reorganisation rather than tax avoidance.
We prepare and submit these clearance applications regularly, manage any follow-up correspondence from HMRC, and make sure the implementation follows the confirmed steps precisely. Having that clearance in place before a deal proceeds protects all parties and removes a potential source of uncertainty during due diligence.
If you’re planning a sale, or simply beginning to think about what your exit might look like, get in touch with our expert tax team to see how we can help.
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