Selling a Company – Share Sale or Asset Sale?

If you are selling a Company, the two main options* to be considered are either: selling the Company shares (referred to as a “Share Sale” which normally includes all the assets and liabilities) or you may wish to sell just the business with its Assets, Name and Goodwill (usually referred to as an “Asset Sale”). 

It will normally be beneficial for you to sell your Company shares rather than choose an asset sale. If the Company sells its business through the sale of assets, name and goodwill, you will then face the problem of extracting the sale proceeds from the Company which could lead to a double tax charge. You will also have to deal with any remaining liabilities and deal with the legal entity of the Company that remains.

*There are other options for formulating a sales deal such as mergers, consolidations, share-swaps, recapitalisations to name a few.

Business Asset Disposal Relief – BADR (formerly known as Entrepreneurs’ Relief)

If you are selling a business, the most important consideration (as far as tax is concerned) will normally be whether or not you will qualify for Business Asset Disposal Relief (BADR) – this means that you only pay 10% Capital Gains Tax on any qualifying gains on the first £1m, but 14% from 6 April 2025 and 18% from 6 April 2026. Business Asset Disposal Relief can be claimed by Directors (and Directors’ spouses or partners in qualifying cases), Sole Traders as well as Partners and Employees of Companies.  There’s no limit to how many times you can claim Business Asset Disposal Relief but as from 11 March 2020, you can claim up to £1 million of relief in total during your lifetime (reduced from £10 million).

For businesses worth over £1m, the new rate will be 10% on the first £1m and 24% above; from 6th April 2025, the rate will be 14% on the first £1m and 24% above; and from 6th April 2026, the rate will be 18% on the first £1m and 24% above.

Will you qualify for Business Asset Disposal Relief (BADR)?

You should be able to qualify for Business Asset Disposal Relief if you dispose any of the following:

  • All or part of your business as a sole trader or business partner – including the business assets after it closed
  • Shares in a Company where you have at least 5% of shares and voting rights (known as a “Personal Company”)
  • Assets you lent to your business or Company

If you are selling all or part of your business, all the following must apply:

  • You are a sole trader or business partner
  • You have owned the business for at least two years before the date you sell or close it
  • You sell or dispose of your business assets within 3 years after selling or closing the business
  • You haven’t exceeded your lifetime allowance of £1 million

If you are selling shares, all of the following must apply for at least 24 months before you sell your shares:

  • You have at least 5% of the shares and voting rights in the Company
  • You are entitled to at least 5% of the distributable profits & net assets of the Company
  • You are an employee or director of the Company (or one in the same Group)
  • The Company’s main activities are in trading rather than non-trading activities like investment or it is the Holding Company of a Trading Group

NB. Many businesses can be of a mixed trading status (eg trading and non-trading eg rent or interest received etc) and any non-trading activities must not be substantial. HMRC’s interpretation of “substantial” is over 20% of total business activity (both trading and non-trading).

If you are selling assets you lent to the business, all the following must apply:

  • You have sold at least 5% of your part of a business partnership or your shares in a Personal Company
  • You owned the assets but let your business partnership or Personal Company use them for at least one year up to the date you sold your business

NB Any gain could be exempt if you sell during a period of non-UK residence.

Other considerations

If a seller’s holding had fallen below 5% because the company issued more shares, the seller may still be able to claim BADR. However, the seller will have needed to elect to be treated as if they had sold and re-bought the shares immediately before the new shares were issued. This will then create a gain on which the seller can claim BADR. This is potentially a complex area and advice should be sought.

With regard to shares that were acquired from an Enterprise Management Incentive (EMI), to be eligible for BADR, the seller must have bought the shares after 5 April 2013 and been given the option to buy them at least two years before selling them.

It is important to bear in mind your overall tax and long-term financial position when considering the various options for extracting profits. For example, you may not want to unnecessarily miss out on tax credits or universal credit, losing some or all of your personal allowance, or incurring a child benefit tax charge because you’ve taken too much income. Also, you should aim to avoid paying tax at the 45% additional rate if at all possible. 

Whoever buys your company will normally expect you to extract all of the Company’s cash before a sale, although some cash will normally be left behind for “working capital” and in any case, “cash for cash” can be agreed if necessary. If there are substantial retained funds, you may wish to consider extracting them several years before a sale in order to avoid a last-minute tax implication.

Summary

There’s still time to take advantage of the 10% tax rate BUT only if you ACT NOW! If you are thinking of selling a business, remember that tax rules often change, and it always pays to take professional advice first. Certainly, any shareholders with anything but a simple share structure should seek advice on their right to claim this highly important tax relief.

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