Don't fear the tax man: The importance of tax planning

When it comes to tax and buying and selling businesses, it’s worth doing your homework. With a little preparation and planning, entrepreneurs can minimise their tax liabilities and maximise their gains.

Getting the right advice at the right time is imperative. Tax implication changes very frequently, so talking to someone who knows the ins and outs of the latest legislation will be useful when trying to limit exposure.

Tax Planning Pays Off

Don’t think it’s too early to start limiting your exposure to certain taxes at least a year before you plan to buy or sell a business. Many of the reliefs that are open to those selling businesses are only claimable if conditions are met for 12 months before the deal is done, so it’s really never too early to start your tax planning.

Entrepreneurs’ Relief

Brought in by the government as a further incentive for individuals to start up new enterprises, Entrepreneurs’ Relief is now worth up to £1.8 million per person. With advanced planning, this can even increase to £3.6 million per individual.

The conditions for claiming Entrepreneurs’ Relief are strict. In order to claim, you must have owned the business in the year that ends with the date the business was disposed of.

Meanwhile, those investing in a business under the Enterprise Investment Scheme (EIS) can claim income tax exemptions. However, this does, again, require some pre-planning.

Capital Gains Tax

Capital Gains Tax (CGT) is a tax that is charged on assets that are held over a long period of time, rather than on regularly traded assets. Companies and individuals can be liable for CGT, but several types of relief are available with a little planning. The government has slowly been reducing the CGT on business sales to try to stimulate the economy and entrepreneurship, so make sure you don’t pay more than you need to when buying or selling.

There are several types of relief you can claim when selling a business to limit your exposure to CGT. Taking tax advice early in the sales process is vital, but you may also be able to claim entrepreneurs’ relief, business asset roll-over relief, incorporation relief, gift hold-over relief

Using these forms of relief, sellers may be able to limit their capital gains tax liability to less than ten per cent when disposing of a company.

Consider Your Shares

The distribution and value of shares held by yourself and your other shareholders can have a major impact on your tax liability when you come to sell your business. Reviewing your share options well in advance of any sale can help to maximise shareholders’ ER. Delaying the payment of share options until after a sale would also increase corporation tax deductions open to the firm – which can be used in negotiations with buyers.

For those investing in a business under the EIS, they can enjoy a tax- free sale after a holding period of three years, this is largely limited to minority shareholders with 30 per cent or less of the business, but is worth considering when buying or selling a business.

Obtaining advice about how to minimise the income tax implications of distributing the proceeds of a business sale is also wise. A company owner may even decide that liquidating a business may be more favourable than selling, in order to avoid the income tax implications of a sale.

Are You a Serial Entrepreneur? Defer Your CGT Payments

Anyone who is selling a business, but intends to invest the gains in another trading company or companies, can defer the payment of their capital gains tax until they withdraw the gains for their personal use. Anyone wishing to buy a business should remember to use the gains made from a previous sale to avoid paying CGT until they personally extract the value from a sale further down the line.

Even if you don’t want to buy a business after selling up, you can still defer CGT payments by investing in a business under the EIS, you can also enjoy 30 per cent income tax relief by doing this.

Inheritance Tax

Performing some simple tax planning tasks can help to minimise your exposure to inheritance tax (IHT). For example, trading businesses qualify for business property relief from inheritance tax. In light of this is could be worth putting some value into a trust that won’t incur any immediate IHT charges. However, this must be done in advance of any sale.

Generally, it is a good idea to take some tax and financial planning advice at the time of a sale in order to limit your IHT exposure. Turning shares in a trading company into cash proceeds will automatically increase your exposure to IHT if you don’t take measures to mitigate this.

If your business holds some assets with values that are not reflected in the deal price as they are of little interest to a buyer, extracting these assets before a sale can be a good move. This can be done with minimal or no extra tax costs and could, in the case of property, reduce the stamp duty burden on a buyer.

Earn-outs & Deferred Consideration

There are a whole host of tax issues that may arise if a business sale is structured as an earn-out or if the deal is to be completed via deferred consideration. In these cases, make sure that the payment of taxes is deferred until the proceeds of the sale are safely in your bank account and that the rate of tax payable on the deal is kept to a minimum.

There has rarely been a better time to save cash through tax planning thanks to the government’s eagerness to stimulate the economy by incentivising enterprise and entrepreneurship. Whether you are looking to buy or sell a business, the importance of tax planning as far in advance as possible cannot be underestimated.

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