Updated 08 August 2017
As part of Small Business Advice Week we are running a series of articles with helpful advice and tips for SMEs. Today, Nick Heys discusses how when it comes to selling your business, it’s the detail that will save you thousands of pounds.
With so much blood, sweat and tears given to build your business to a level where you can sell and walk away with the profits, why is that the crucial details are so frequently missed at point of sale? It’s this detail that may cost any seller thousands of pounds in tax, which you could and should have avoided.
“Entrepreneurs’ relief can reduce potential tax bills on the sale of shares from 28 per cent to just 10 per cent”
Wearing two hats
I think it’s fair to say, very few deals for business sales and acquisitions now have 100 per cent cash on the table for the seller, so deferred consideration is the common way that deals are being funded. It’s for that reason that sellers should see themselves wearing two hats, as a seller and a commercial money lender and have a genuine appreciation of the likelihood of getting the deferred consideration they agree at point of sale.
From a financial planning angle, It’s also key to ensure that any deferred consideration is structured in such a way that you maximise the availability of ‘entrepreneurs relief’ (ER) on all sums received. This can reduce potential tax bills on the sale of shares from 28 per cent to just 10 per cent!
Capital gains tax
It is important to remember that the sale of shares is a sale of a capital asset, thus any gain subject to capital gains tax. However if the money received is not attributed to a sale of shares then it is simply income, thus income tax applies. The introduction of deferred consideration introduces a gap between the date monies are received and the date the shares are sold which leaves a seller potentially exposed to a challenge by HMRC. This is now common so ensure you don’t get caught out and take professional advice.
I’m not an accountant, nor a corporate solicitor but this is why at the early stages you should take professional advice as most business owners don’t understand the subtle nuances and why should you? Therefore early advice and the right professional will consider the implications of potential tax on deferred consideration and shall ensure the sale agreement is drafted correctly.
If you’re accepting any kind of deferred consideration you need to structure it so it is tax efficient and don’t be afraid to play around with it to meet your advantage. Don’t just accept what is on the table in the form of deferred consideration as may inadvertently lead to bigger tax bills which means less cash for you.
Getting the lifestyle you deserve
It’s essential your financial planner works with you to get you your desired lifestyle. From time-to-time the introduction to other professional partners could help you save time, money and stress which hopefully you can use to make your retirement more complete.
Speak to a financial adviser today to make sure you’re not wasting tax and can make the most of selling your business.