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LEGAL VIEW
HEADING FOR THE DOOR
By Ged Henderson
You’ve spent time and energy building up your business but what happens when it’s time to depart? How do you clear a path towards the exit and make sure it is the right route for you and those around you?
This can be a life-changing event for you and your family, so it is vital to get both the exit and what life will look like once you’ve gone through the door right.
It is a challenge being taken on by a growing number of business owners. Jane Parry, managing partner at Blackburn headquartered accountants, business advisers and financial planners PM+M, says: “Despite the current economic climate, we are seeing more family businesses gearing up for potential sales.
“The key advice that we give every time is: Plan. Plan. Plan. This is especially pertinent when it comes to tax because, for example, Business Asset Disposal Relief requires a two-year qualifying ownership period pre-sale to access the 10 per cent tax rate.”
She adds: “However, before any of that, it is essential that business owners understand the options that are available to them, and they choose a structure of sale that will work best for them. They all have their own benefits and pitfalls.”
You could sell your shares to a third-party buyer which may maximise the price, but the challenges are finding the right buyer and having to pay Capital Gains Tax (CGT).
Another option is to sell to your management team. The price may be less, and you might need to be paid over time, but a lot of people find it an easier route even though CGT remains an issue.
Jane adds: “Over the past few years, we have seen a big rise in the use of employee ownership trusts (EOTs). These can be tax free, but you’ll probably have to be paid out over a few years and you’ll need to ensure that employee ownership is right for your business.”
Tony Medcalf, tax partner at Preston headquartered MHA Moore and Smalley, which provides accounting, business advisory and wealth management services, says that EOTs are becoming increasingly popular and a “genuine alternative” to traditional MBOs.
He adds: “Passing on a business to family members may be more challenging from a tax perspective. Careful structuring is required to ensure HMRC is satisfied that arrangements are not solely designed to allow shareholders to realise value in capital form.
“Articulating the commercial drivers of the transaction to HMRC in advance of an exit via a clearance application will give shareholders certainty of the tax position and peace of mind.”
Jane Parry says: “Some sensible planning pre-sale involving family trusts or a family investment company structure may be advisable. You must think about this before the sale, because afterwards may be too late.”
And she adds: “Once you have sold your business it is important to consider how best to approach your finances to minimise your inheritance tax exposure, as selling a trading business materially changes an individual’s inheritance tax (IHT) position.
Jane Parry
He says: “The tax-free exit they provide is a significant attraction following the scaling back of Business Asset Disposal Relief in recent years.
“Shareholders using EOTs to facilitate their exit planning need to decide whether they will retain a minority stake in the business. If they do, they need to be comfortable that they may no longer call the shots and be prepared for a cultural shift.”
“Sellers will also need to work out how much they will need to live on based on their intended lifestyle and how much they will be able to pass on. This will enable them to plan effectively to reduce the amount of inheritance tax their estate will be subject to and maximise what they can leave to their loved ones.”
She says a Family Investment Company can be a “tax-efficient vehicle” to pass wealth to future generations. Sales proceeds are reinvested rather than being passed on personally and subject to IHT.
Spreading shares across a number of family members can achieve both inheritance tax and income tax efficiency.
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