Reducing the tax charge on the sale of your company

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Published: 27 May 2015

Can you really reduce the tax charge from 28% to 10% (and possibly more!) on the sale of your company?

I’m sure that, if it was possible, you’d definitely want to reduce the tax charge from 28% to 10% on the sale of your company!

There should always be included in the process of planning for the sale of your company, the steps that need to be taken to reduce the tax charge on sale.

Sale Strategy

Generally speaking, the sale of shares in the company is more tax efficient than the sale of assets out of the company. This is because, in the latter case, there can be a double tax charge, since capital gains tax may be payable by the company on sale of the assets and by the individual shareholders on liquidation of the company. However, sometimes the purchaser prefers to buy assets out of the company, so it may be necessary to have a sale price strategy that encourages the purchaser to buy the company shares as opposed to the company’s assets, name and goodwill etc.

Entrepreneur’s Relief

The next important consideration is the type of company to be sold. If it is a trading company as opposed to a non-trading company, such as an investment company or a property investment company, capital gains tax is payable at 10% of the gain as opposed to the higher rates of 18% and 28%, providing:-

  1. The shareholder is UK resident during the tax year of sale.
  2. The shareholder holds is at least a 5% interest in the ordinary voting shares for at least 12 months, prior to the sale.
  3. The shareholder is an officer (director or company secretary) or employee of the company for at least one year prior to the company sale.
  4. The maximum gain for each individual to which the 10% tax applies is a lifetime limit of £10Million. I assume this is not a problem, unless your name is Richard Branson!

This 10% (as opposed to 18/28%) tax rate is known Entrepreneur’s Relief.

Associated Disposals

Quite often a trading operation is structured with the company owning the business i.e. goodwill, equipment, and working capital, whereas the individual shareholder(s) owns the property in which the company carries on its business.

It is usual that the property is sold at the same time as the sale of the business, since it will be required by the buyer or is no longer required by the seller. In spite of being in the shareholder’s, as opposed to the company’s, name, the gain qualifies as an “associated disposal” and is taxed at the lower rate of10% as well.

Enterprise Investment Scheme (EIS) Relief - The icing on the cake!

Normally, the company sale proceeds are used to repay any existing debt, improve the home, make family gifts and retain sufficient funds for retirement in conjunction with pension policies and other investments.

If there is any surplus available, and subject to the advice of your investment adviser, you may wish to consider investment of some of the sale proceeds in an Enterprise Investment Scheme. These investments may be riskier than leaving your money in the bank at ½% to 3% interest p.a., but, you can:- 

  1. Claim the cost of the EIS investment against your taxable income up to a rate of 30% for the current or previous tax year or,
  2. Defer payment of Tax on Capital Gains by the amount of the EIS investment until sold, and
  3. Obtain tax relief on any loss (net of tax relief) of any EIS investment, and
  4. Obtain IHT exemption after holding an EIS investment for two years.

Generally speaking, an EIS investment needs to be made for at least three years. Sundial Tax & Finance Ltd can introduce you to brokers, registered with the Financial Conduct Authority, for further advice on this.

This represents a brief overview of the capital gains tax implications on sale of a limited company. There are many other points of detail to consider and David Cane of Sundial Tax & Finance Ltd will be glad to answer any further queries at no cost to the enquirer.

Just call 0845 177 0036. If a full review and calculation of the capital gains tax liability is required, a fee will be quoted in advance.