11th November 2019
Following our blog on the legal fundamentals of a sale, we turn to the importance of tax implications that come with selling an IFA business. Neil Davies, Partner at Saffery Champness LLP, gave a broad overview of some of the key tax implications when you sell your business and exit the industry. Fundamentally, it is important to remember that everyone’s situation is unique and it is key to seek appropriate tax advice from the moment you are thinking about exiting the industry. An expert can help to identify the most beneficial process for you and help minimise your exposure.
Tax Implications of Selling Your Business
When thinking of retirement or exiting the industry, ask yourself the following questions: what do you want to happen to the company? Do you want to pass the legacy on to family members or do you want to cease trading and dissolve your company and/or assets? If you were to simply draw all the money out from the company and leave, you would be left with a very high tax bill to pay. Instead, you could sell your business. This is usually the most tax efficient way to move out of the industry. What is best for you depends on your individual circumstances, it is important to seek tailored professional advice.
Asset vs. Share
An Asset Purchase is when the buyer acquires your trade and assets but the company remains. As you still own the company, your gain is subject to Corporation Tax. If you wish to withdraw the money from the company, there is another layer of tax to consider. You could also take dividends from the company, liquidate the company and get entrepreneurs relief or keep the company purely for investment purposes and pass it on to your family (family investment company).
A Share Purchase refers to a buyer acquiring the whole company. Depending upon negotiations, this can include staff, offices, equipment and more. With a share purchase, you would be subject to Capital Gains Tax, so it is important to talk to an accountant to limit this and get the most out of your entrepreneurs’ relief.
Entrepreneurs’ relief is available for both sole traders and limited company owners. It means ten million pounds of lifetime qualifying gains will be taxed at 10%. Conditions may change but you will currently qualify for entrepreneurs’ relief if you meet the following criteria for at least 24 months before the sale:
Thinking ahead about the future of your business and the possible sale can be beneficial as you may want to carry out some restructuring to ensure you can qualify for entrepreneurs’ relief and avoid a larger tax bill.
Enterprise Management Incentives (EMI)
EMI options should also be considered prior to a sale. These can provide an opportunity to align the interests of shareholders and employees. Firstly, you need to consider if your company qualifies for an approved share option plan such as EMI. If it does, this can benefit employees, as EMI shareholders do not have to meet the 5% test for entrepreneurs’ relief resulting in their effective tax rate reduced from approximately 60% to 10%. EMI can also present the opportunity to agree a lower value with HMRC, maximising the growth subject to Capital Gains Tax.
Deferred Consideration and Earn Outs
Deferred Consideration refers to the fixed amounts that are paid in the future. This is a common way in which businesses are purchased. With this type of sale, it is important to note that the total payment you are due to receive is still taxable at the point of sale, despite not having yet received the cash. Earn Outs are based on future profits or revenues, however, in certain circumstances you can pay Capital Gains Tax by instalments.
Fundamentally, early planning is key to make the most out of your sale and avoid higher tax rates. Talk to an accountant before you even look around for potential buyers as they can help to identify what will be key in your negotiations and what is best for you and your circumstances. Consider whether any restructuring may be needed to ensure you will be able to receive maximum entrepreneurs’ relief. Think about what you really want; do you want the company to be sold, cease trading or be kept as a family investment company. Tax advice is imperative when considering a sale, seek advice from an accountant to maximize your tax allowance.
For more information about retirement and how to exit the industry, click here
About Saffery Champness LLP
Saffery Champness is one of the UK's Top 20 accountancy firms. For over 160 years they have provided advice to clients and worked together to deliver the very best for them.
To find out more about Saffery Champness, please click here.
To find out more about Neil Davies, please click here.