So, you’ve made what is probably the most difficult decision a business owner has to make – to exit the business. Now what? There is honestly no substitute for early, pragmatic, professional advice but before taking that step it is worth understanding and considering all the variables:
- Are you entitled to Entrepreneurs’ Relief?
- How will the sale consideration be received – cash, earn out, loan notes or shares?
- Is the sale going to be of the shares in the company that owns the business or just the business assets themselves?
What is Entrepreneurs’ Relief?
Entrepreneurs’ Relief (ER) was introduced to reward people who start up and grow businesses by providing a reduced level of Capital Gains Tax (CGT) on qualifying business disposals. It is therefore only available to individuals.
Depending upon the type of sale, CGT is payable on the gain from the sale of a business. However, if the seller can benefit from ER they can reduce the rate of CGT, from the most likely top rate of 20%, to just 10%.
It is therefore worth checking that your business structure allows you to benefit from ER.
ER is currently available on up to £10m of lifetime gains so you could save up to £1m. As this is a lifetime limit it allows you to sell a number of businesses throughout your career.
ER would typically apply to a business disposal (or share sale), although it can also be claimed for some asset sales where they are associated with a qualifying business or share disposal.
Entrepreneurs’ Relief on the sale of shares
ER is generally available on the sale of shares if:
- The company is trading (and the trade meets certain conditions), and
- The taxpayer has been an officer or an employee for a least one year at the time of disposal, and
- The individual has held at least 5% of ordinary share capital enabling them to exercise at least 5% of the voting rights for at least one year at the time of disposal.
Investors’ Relief for external investors on the sale of shares
A further relief has been introduced with effect from 6th April 2016 for external investors in unlisted trading companies. The reduced Capital Gains Tax rate of 10% will apply to disposal of ordinary shares in an unlisted trading company provided that:
- The shares were newly issued to the investor on or after 17th March 2016; and
- The shares have been held for at least three years from 6th April 2016; and
- The lifetime cap of £10m is not exceeded. this cap is in addition to the lifetime limit of £10m for Entrepreneurs” Relief.
Entrepreneurs’ Relief on the sale of a business
ER is generally available on the sale of a business by an individual whether that is a sole trader or an interest in a partnership if:
- Business is trading (and the trade meets certain conditions), and
- The disposal is all or part of a business that an individual has owned for at least one year prior to the date of disposal, and
- The disposal must be of assets comprising the business and not just particular assets used in the business.
Entrepreneurs’ Relief on the sale of assets
ER is also available on the sale of assets owned personally but used in a qualifying trade of an individual’s ‘personal company’ (5% of shares etc set out above) or a partnership of which the individual is a partner. In order for it to apply to asset sales the asset sales must be associated with a qualifying disposal of shares or interest in the partnership. The associated disposal rules are complicated and there can be restrictions where the asset has only been used partly for business or rent has been charged for the use of the asset.
Planning is everything
Before embarking on the sale process:
- ER may be available to key members of the management team as well as the controlling shareholder through careful planning. This may be through an EMI share option scheme or, through a shareholding. Managing the exit plan for those shareholders just above or below the 5% threshold requires careful planning and steps may need to be taken more than 12 months before the planned exit.
- Get your business in the best possible shape it can be. This will probably mean appointing an adviser 12 to 24 months beforehand to help you prepare your detailed exit plan.
- Consider if you want to make a ‘clean break’ or continue to be involved with the business after the sale. Consider what will be viable in the eyes of the buyer.
- Consider the typical methods of acquisition for your type of business (share or asset sale) and the typical types of consideration (cash, shares, loan notes, earn-out).
- Don’t go it alone, appoint an adviser with a solid track record of selling businesses who can guide you through the process.
- Appoint a lawyer (selling a business is a legal minefield with many traps awaiting the unprepared) but only do so at the appropriate time – you may have to ‘kiss a number of frogs’.