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Tax Implications from Share Disposals

Tax is complicated.  The tax legislation in 2011/12 ran to 38,421 pages over 8 volumes.

The facts of each case are important and careful planning tailored to the specific circumstances is essential to ensure that there are no nasty surprises lurking within those 38,000 pages.  Some of the most common considerations are detailed below:-

Entrepreneurs’ Relief

The sale of a business will hopefully give rise to a chargeable gain.  Chargeable gains are usually subject to tax at either 18% or 28%, which is a significant proportion the sale proceeds.  Worse, without due care in structuring they may be charged to tax as income at current top rates of 52% (or effective 62% rate in certain income brackets).

However, with careful planning, the tax rate can often be reduced to 10%, via Entrepreneurs’ Relief.  This can be achieved on up to £10,000,000 of lifetime gains.

The detailed conditions for Entrepreneurs’ Relief including voting rights and employment must be met for at least 12 months prior to the sale of the business.  Experience shows this can often be an issue in family businesses, where different individuals are involved.

The company should also be ‘clean’ of non-trading investments, which could affect its qualifying status.  A ‘health check’ in advance of starting the sales process is generally wise.

Deferred Consideration

A fairly common feature on a sale of shares in a private company is an element of consideration which is delayed, either for a set period of time or based on certain conditions being met.

The tax impact of these innocuous looking payments can often be surprising and can lead to unwanted tax liabilities arising before any funds have been received. In most cases, the tax will be payable in the year following disposal, regardless of when the deferred proceeds are received. The worst case scenario is that tax could be payable in full on such proceeds but with no relief in the event that the proceeds are not subsequently received.

Consideration will be needed as to whether the deferred payments can be ascertained as this will have an impact, particularly on Entrepreneurs’’ relief.  In tax the devil is in the detail and a small matter which is overlooked could result in a significant tax charge.

Tax Advice before Heads of Terms

Taking tax advice at an early stage, preferably before negotiations fixing Heads of Terms, is advised to ensure that the sale goes smoothly without any unexpected tax bills arising in the future.  It also avoids having to renegotiate the sale terms at an advanced stage.

It also gives you the opportunity to plan for the future, tailored to your own objectives, whether it be reinvestment (say in the new Seed Enterprise Investment Scheme) setting up the family for the future, or planning to go and live abroad.

 

This article was sponsored by Eaves & Co, Specialist Tax Advisors.  Tel:  01704 548698 Web:  www.eavesandco.co.uk

 

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