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Business Exit Planning

Newsletter issue -September 2011.

Are you thinking about hanging-up your working boots and passing-on your business? This takes a lot of planning to get the best possible tax outcome.

If you have younger relatives who could take on the business it is advisable to get those individuals involved in the management for a considerable period before you go. You may need to restructure the business to make this hand-over easier, perhaps incorporate, or slim-down the enterprise.

Where your business is already run though a company, a neat method of exiting for the founder is to have the company purchase its shares from you. However, this 'purchase of own shares', as it is called, must be planned and undertaken in a very precise way to ensure the tax charges are as low as possible.

Another option is to sell all or part of the business to another person. This also needs to be planned at least a year in advance to ensure you and all your fellow shareholders achieve the maximum tax relief on the sale.

Entrepreneurs' relief can be claimed for most company sales, which reduces the effective rate of tax from 28% to 10% on the first £10 million of gains made by each shareholder. To qualify for entrepreneurs' relief each shareholder and the company must meet all of these conditions:

  • The shareholder must hold at least 5% of the ordinary shares of the company and 5% of the voting rights for the company for at least one year ending with the sale;
  • The shareholder must be an employee, or director, or company secretary of the company for at least one year up to the date of the sale;
  • The activities of the company must be at least 80% trading, as opposed to investment, or it must be the holding company of one or more trading companies.

Where your family members have minority shareholdings check whether they will each meet the 5% threshold. Consider gifting some shares to your grown up children or spouse to achieve this threshold. Where shareholdings exceed 5% but the individual does not work for the company, consider making them a non-executive director, or giving them a small part time position at the company for 12 months to the date of the sale.

If you are considering selling your business please talk to us well in advance to get the right planning in place first.