BUYING OR SELLING A BUSINESS
Selling a Business
Selling your business will involve either the sale of the shares in the business, the assets of the business or a hive down followed by a hive out, or a combination of these. Ownership of a business can also arise in a management buyout, share for share exchange or reconstruction & amalgamation of the business.
In a share sale, the buyer acquires the company that operates the business, by buying its shares. The seller is taxed on the gain where capital gains tax is charged (currently at 33%) on the difference between the sale price and the purchase price of the shares. A number of reliefs such as retirement relief/Entreprenuer Relief/Share Buyback/Share for share exchange/Reconstruction or amalgamations, may operate to reduce the overall capital gains tax payable.
For example, if the seller is an individual looking to exit a family business or retire, the objective will likely be to maximise the amount of cash they will receive from the business immediately after the transaction.
The tax charge on a share sale may be lower than on an asset sale if there is a higher base cost in the shares. A share sale will avoid double taxation which would generally arise on an asset sale, however an asset sale can generate a loss if that is preferred for tax purposes.
Tax warranties and representations will be required from the seller by the purchaser in respect of the current and historic tax affairs of the business. A share sale will require increased tax due diligence on the part of the purchaser which could delay a sale.
In an asset sale by a company, ownership of the shares does not alter. The buyer purchases individual assets from the company. For sellers, asset sales generally attract a higher overall tax bill because the gains on the sale of assets are first chargeable to corporation tax (currently up to 25%) in the company and, when distributed to the shareholders as a dividend, are subject to income tax (currently up to 48%). Generally the operation of the foregoing rules motivate a seller to choose a share sale.
Conversely, as there is less due diligence for the buyer to perform in an asset sale, the transaction can often be completed more quickly and more cost-effectively. Further, an asset sale has less chance of falling through as a result of an unexpected glitch during due diligence (and such “glitches” are not uncommon in share sales!).
The tax calculation can be quite complex for asset sales as different categories of assets may have to be treated differently for tax purposes. If on a capital asset the seller has claimed capital allowances, for example, and then sells the asset for more than the book value, he may be liable to pay a “balancing charge” to Revenue which would ultimately reduce the net cash benefit the seller receives from a transaction.
However as buyers sometimes prefer to buy assets rather than shares, a corporate seller can often negotiate a higher value for an asset sale than a share sale. The rationale for the foregoing being that there is value when a corporate seller retains the responsibility (and cost) of clearing liabilities and tidying up post-sale.
An asset sale may trigger losses and/or balancing allowances in the seller company which can be utilised by the seller company after completion of the asset disposal.
A share sale may sometimes not be practicable for a seller group of companies if a sale of the target company would ‘break’ a group and trigger a clawback of a previously-claimed group relief such as Capital Gains Tax group relief or the ‘associated companies’ exemption from stamp duty. An asset sale may provide a solution in these circumstances.
Sale of Shares in a ‘hived-down’ Structure
A hive-down structure is a half-way between a sale of shares and a sale of assets. In this situation a corporate seller transfers particular assets to a new subsidiary (or ‘newco’), and the buyer purchases (the shares in) newco. The buyer gets a company holding the assets it wants with a short tax-history and pays stamp duty at 1% for the shares. The potential issues for a shareholder regarding double taxation could explained at paragraph 1 above under the heading ‘asset sale’ could arise however.
It is possible for a seller company to transfer assets to a new subsidiary without giving rise to a chargeable gain for CGT (provided it is a 75% subsidiary); VAT (where it is the transfer of a business or part thereof) or stamp duty (provided there is a 90% group relationship between company and subsidiary).