Whilst this article focuses on tax considerations, early planning is essential more generally to identify and carry out any actions needed to ensure that the business is an attractive commercial proposition. As regards tax, the business’s own position can affect the price that a purchaser is willing to pay for it; whilst the holding structure and availability of tax reliefs can affect the amount of tax suffered by the sellers on that price.
Tax position of the business
Often, an exit is achieved by selling the company carrying on the business. In that case, the purchaser will wish to understand and investigate the company’s affairs. It will typically engage professional advisers to carry out due diligence on key areas, including tax. Where issues are identified, the price may be reduced or deferred in part until the matter is resolved with the tax authorities. Normally, the sellers will also have to give warranties and indemnities to protect the purchaser if further liabilities are discovered after the sale has completed.
We recommend that an early review is carried out to identify and resolve any such matters before the sales process begins. That assists in preserving value, simplifying the sale and presenting the business as well managed and controlled. The review should also consider the availability of any tax assets (e.g. tax losses, R&D tax relief or capital allowances) which may increase the value of the company.
Holding structure and availability of reliefs
As far as possible, the business and the way it is owned should be structured to be tax efficient for the entrepreneur when the ultimate sale takes place.
In that regard, we encounter holding structures which would result in multiple layers of tax when returning sales proceeds to the ultimate owners. With early action, it can be possible to restructure and simplify the position to avoid unnecessary tax charges.
Tax reliefs have been introduced to incentivise the establishment and growth of new businesses. However, they are subject to detailed conditions and their availability should not be assumed without checking the position.
For instance, many business owners will be aware of Entrepreneurs’ Relief which, when available and claimed, provides for a lower 10% rate of capital gains tax, subject to a lifetime limit of £10m of qualifying gains. We have seen a number of cases where the expected relief would not in fact have been available because of a failure to satisfy the conditions relating to the owner, the shareholding and/or the company’s tax status. Since, typically, these conditions require to be met throughout the year before the sale takes place, it can be too late to rectify the position if this is identified during the sales process. However, if the sales process is deferred or aborted, value can be lost if economic conditions change before the business is sold at a later stage.