Important notice

Although the content of this article was correct at the time of writing, the accuracy of the information should not be relied upon, as it may have been subject to subsequent tax, legislative or event changes.

Getting Started

Selling a business

The tax implications of exiting a business can be highly complex, and mistakes are costly. By taking appropriate advice, you can make sure you get it right, say business advisers Kingston Smith.

When a client approached Kingston Smith, negotiations to sell his business were already under way and draft heads of terms were about to be signed. The deal was for an upfront payment in cash of £4m plus an ‘earn-out’ that was likely to generate the same amount again. The client was hoping to pay capital gains tax at 10% on the full capital gain by taking advantage of Entrepreneurs’ Relief (ER).

However, the way the deal had been drafted meant that it was likely that ER would have been limited to the gain arising on around £6m of the proceeds with anything above that attracting capital gains tax at 20%. Fortunately, the tax team at Kingston Smith were able to restructure the transaction in such a way as to secure Entrepreneurs’ Relief on the full gain, saving the client over £200,000.

A perfect fit

Each business is different, and a one-size-fits-all approach will never be the best way to maximise returns and limit tax liability. When buying or selling a business, just a few of the factors that need to be taken into account are:

  • The different ways that the sale can be structured
  • How to maximise the availability of various tax reliefs
  • Whether an advance tax clearance from HMRC should be sought
  • How to structure any deferred consideration or ‘earn-out’ from the disposal
  • Ensuring sale consideration is not liable to PAYE and NICs
  • The tax consequences for an Enterprise Investment Scheme or Seed Enterprise Investment Scheme investor selling their shares

Once you have received expert advice on these points, you will be in a position to decide how – and whether – to proceed. But specialist tax support doesn’t end there. An expert tax adviser can:

  • Review the heads of terms for consistency with the advice being given
  • Review the sale and purchase agreement from a tax perspective
  • Review tax warranties
  • Suggest disclosures that should be made against the tax warranties
  • Review the deed of tax covenant
  • Work closely with the lawyers involved in the transaction
  • Advise the vendors of likely capital gains tax liabilities and provide schedules stating amounts and due dates.

Business owners spend years, decades or sometimes an entire lifetime accumulating knowledge about their particular industry sector. But buying or selling a business is something most entrepreneurs will only do on one or two occasions. Therefore, it makes sense to turn to the experts to ensure that you get the tax position exactly right.

Views expressed in this article are those of the contributor and for general advice purposes only. No responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained here in can be accepted by the LLP or any of its associated concerns. Kingston Smith LLP is registered to carry out audit work and regulated for a range of investment business activities by the Institute of Charted Accountants in England & Wales.