Finding the perfect exit strategy
Article Date: Dec 14 2006Tax implications
Before selling your company you may want to consider tax-efficient strategies of withdrawing funds from the business. Ways in which to do this include paying dividends, bonuses and termination payments. However, if you do make these sorts of withdrawals it may affect the sale price of the company. Similarly, you need to strike a balance with the amount of cash you leave in the business, as HM Revenue & Customs can view excessive amounts as tax avoidance and penalise accordingly.
Capital gains tax and selling shares
Any profits you make from the sale of your assets will be liable to CGT. This is calculated for each tax year (which runs from 6 April one year to 5 April the next). It is charged on the total of your taxable gains, after:
· deduction of the costs of acquisition and disposal of each asset
· taking into account any reliefs that affect the amount of a gain – some apply automatically while others have to be claimed
· deduction of allowable losses arising from the disposal of other shares or assets
· applying 'taper relief' – this may reduce the taxable gain on an asset depending on the nature of the asset and how long you have held it
· deducting from the total taxable gains left the 'annual exempt amount' (AEA) – for the tax year 2006-2007 this is £8,800.
How much CGT you pay depends on your overall income. Your total taxable gains are added to your taxable income for the year and treated as the top part of that total. The gains are then charged to CGT at the following rates (2006-2007 tax year):
· Ten per cent where they fall below the starting rate limit for income tax (£2,150)
· 20 per cent where they fall between the starting rate and basic rate limits for income tax (£2,151 to £33,300)
· 40 per cent where they fall above the basic rate limit for income tax (£33,301 and above).
Taper relief
Taper relief, introduced in April 1998, reduces the amount of the net chargeable gain the longer the asset is held. Taper relief is based on the size of the gain and the length of time an asset has been held, with maximum relief accruing over two years. Only complete years qualify for the relief.
For a higher-rate taxpayer, disposing of an asset after one year attracts taper relief of 50 per cent and so an effective CGT rate of 20 per cent. When an asset that has been held for two years is sold, taper relief of 75 per cent is applicable, resulting in a CGT rate of 10 per cent.
How this can work in practice
Let’s suppose you start up a high-tech business from scratch that is in a high-growth area and is very attractive to speculative investors. If you sold the business for £10 million after one year from the date you started trading you would have to pay 20 per cent CGT on the whole sale, unless you include an element of ‘deferred consideration’ into the sales contract. In this way you could pay 20 per cent on a portion of the sale and then, by waiting another year to claim the rest of the purchase capital, you could be eligible for the 10 per cent rate on the remainder of the business. Accruing these benefits is something a tax advisor would structure into the sale terms on your behalf.
VAT
If your company is registered for VAT, you will need to contact HMRC and complete form VAT 7 to cancel your registration, or form 68 to transfer your registration to the new owner.
Summary
Exit planning can be confusing for business owners, especially if this is the first time they have sold a business. For many, being in the position of selling marks the culmination of many years’ hard work and personal sacrifice. A well-thought out exit strategy will enable you to maximise your end rewards in terms of the value you ultimately get from your business. An ill-thought strategy may leave you wishing you hadn’t sold up at all!
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