However you plan to exit your business, McEwan Wallace can help you to minimise your liability tax.
The importance of forward planning
At some point you will want to stop working in your business and either sell up, in which case a business exit plan is crucial and could make all the difference to your long-term personal finances. Alternatively, you may wish to hand over the reins to your successors, in which case good planning will also help to ensure a smooth transition.
Important issues to consider include:
- passing on your business to your children or other family members, or to a family trust
- selling your share in the business to your co-owners or partners
- selling your business to some or all of the workforce
- selling the business to a third party
- public flotation or sale to a public company
- winding up
- minimising your tax liability
- what you will do when you no longer own the business.
Selling the business
If your business has a market value, or if you are looking to your business to provide you with a lump sum on sale, it is important to start planning in advance, especially if you envisage realising the value of your business in the next few years. Selling your business is a major personal decision and it is very important to plan now if you want to maximise the net proceeds from its sale.
You will need to consider:
- the timing of the sale
- the prospective purchasers
- the opportunities for reducing the tax due following a sale.
We can help with these considerations.
Maximising the sale value
Up-to-date management accounts and forecasts for the next 12 months and beyond will be close to the top of the list of the information which you will need to make available to prospective purchasers.
Anyone who is considering buying your business will want to be clear about the underlying profitability trends. Are profits on the increase or declining? Historical profits drive the value attributable to many businesses and therefore a rising trend in profitability should result in an increase in the business’s value.
This means that profitability planning is particularly important in the years leading up to the sale.
A professional valuation will put you on more solid ground than educated guesswork. We can work with you to determine how you can add value to your business.
Your business valuation
When considering business valuations, some of the key questions to ask are:
- Are sales declining, flat, growing only at the rate of inflation or exceeding it?
- Are stock and equipment a large part of your business’s value, or is yours a service business with limited fixed assets?
- To what extent does your business depend on the health of other industries/the economy?
- What is the outlook for your line of business as a whole?
- Are your business’s products and services diversified?
- How up to date is your technology?
When is the best time to sell?
It is important to consider a number of factors when deciding on the best time to sell your business. These could be factors that may influence potential buyers as well as your own personal circumstances.
Personal factors to consider might include:
- When are you planning to retire?
- Do you have any health issues?
- Does your business have an heir apparent?
- Will your income stream and wealth be adequate, post-sale?
Meanwhile, business questions might be:
- What are the current trends in the stock market?
- To what extent is your business ‘trendy’ or at the leading edge?
- Is your business forecasting increases to the top and bottom lines?
- How well is your business performing when compared to other, similar businesses?
- Is your business running at, or near, its full potential?
Considering capital gains tax (CGT)
As a basic rule, CGT is charged on the difference between what you paid for an asset and what you receive when you sell it, less your annual CGT exemption if this has not been set against other gains. There are several other provisions, which may also need to be factored into the calculation of any CGT liability.
CGT reliefs can reduce a 20% CGT bill significantly. It is vital that you consult with us about the timing of a sale and the CGT reliefs and exemptions to which you might be entitled.
Calculating your CGT liability
The taxable gain is measured simply by comparing net proceeds with total cost (including costs of acquisition and enhancement expenditure). The rate of tax depends on your overall income and gains position for 2022/23. Gains will be taxed at 10% to the extent that your taxable income and gains fall within the upper limit of the income tax basic rate band and 20% thereafter. These CGT rates are increased to 18% and 28% for ‘carried interest’ and gains on residential property.
A special tax relief, Business Asset Disposal Relief (BADR), is available for those in business, which may reduce the tax rate on the first £1 million of qualifying lifetime gains to 10%. This is targeted at working directors and employees who own at least 5% of the ordinary share capital of the company and the owners of unincorporated businesses.
The relief is available to individuals on the disposal after two complete qualifying years of:
- all or part of a trading business carried on alone or in partnership
- the assets of a trading business after cessation
- shares in the individual’s ‘personal’ trading company
- assets owned by the individual used by the individual’s personal trading company or trading partnership where the disposal is associated with a qualifying disposal of shares or partnership interest.
5% rules for company shareholders
To qualify for BADR, the company needs to be an individual’s personal company where the individual must:
- be a company employee or office holder
- hold at least 5% of the company’s ordinary share capital; and
- be able to exercise at least 5% of the voting rights.
They must also satisfy one of the following tests:
- a distribution test – an individual is entitled to at least 5% of the company's profit available for distribution to equity holders and 5% of the assets available for distribution to equity holders in a winding up; or
- a proceeds test – an individual is entitled to at least 5% of the proceeds in the event of a disposal of the whole of the ordinary share capital of the company.
All planned transactions require careful scrutiny to ensure the available BADR is maintained. Remember to keep us in the picture – we are best placed to help and advise if you involve us at an early stage. Investors’ Relief (IR) also provides a 10% rate with a lifetime limit of £10 million for each individual. The main beneficiaries of this relief are external investors in unquoted trading companies.
CGT and non-residents
CGT is normally only chargeable where the taxpayer is resident in the UK in the tax year the gain arose, although the provisions of any double taxation treaty need to be checked. CGT may not apply where the taxpayer becomes non-UK resident before the disposal and remains non-resident for tax purposes for five complete tax years.
CGT and death
There is no liability to CGT on any asset appreciation at your death.
Inheritance tax (IHT) and your business
- Lifetime transfers
- For the business owner, the vital elements in the IHT regime are the reliefs on business and agricultural property (up to 100%), which continue to afford exemption on the transfer of qualifying property, or a qualifying shareholding.
- Transfers on your death
- Remember to take into account your business interests when you draw up your Will. While reliefs may mean that there is little or no IHT to pay on your death, your Will is your route to directing the value of your business to your chosen heir(s) unless the disposition of your business interest on your death is covered by your partnership or shareholders’ agreement.
Your next steps: contact us to discuss...
- Getting your business ready for sale and minimising the tax due
- Identifying successors within the business
- Exploring possible purchasers
- Valuing your business
- Timing the sale and maximising the sale price
- Planning your transition to your next venture
- Providing for a transfer of your business interests at your death or in the event that you become incapacitated
If you would like advice on tax planning strategies for your business, including business exit strategies, please contact McEwan Wallace.