QUESTION: My husband and I run a family fashion business through a company and envisage retiring within the next five years. What should we be doing now to prepare the business for a sale?
ANSWER: A business sale is a one-off opportunity to crystallise the value that owners have built up over the years. Not only could planning for a future sale make your business more attractive for potential buyers, but it could also mean you can structure in a way that means you pay less tax.
Periodically you should ask yourself, if an unexpected offer is made are there any adverse tax issues or ownership matters which might may weaken my bargaining power or delay a sale while we correct?
Could I sell immediately and structure the deal tax-efficiently? Are the family shareholdings as tax-efficient as possible to maximise available tax reliefs? Thinking like an outsider or asking a trusted business adviser to assist could identify and address key risks before they ever become an issue.
A future buyer will likely undertake due diligence to gain an understanding of your business along with the risks and rewards a purchase would offer them. They will take a detailed look of your records, at least a two years historical records as well as current records and forecasts for the future. Getting into the habit of maintaining this detail to a high standard will mean that this process can be streamlined during negotiations.
The main tax relief that you will aiming to apply to the company’s sale is Business Asset Disposal Relief (BADR), the new name for Entrepreneur’s Relief (ER) if you are familiar with its rules. This relief, which is available on the first £1 million of an individual’s lifetime gains, taxes the individual at a rate of only 10 per cent, instead of the normal capital gains tax rate of 20 per cent for higher rate taxpayers.
It is riddled with complexity, therefore shareholders should be thinking about BADR well in advance of a sale, if they hope to pay tax at 10 per cent.
To qualify for BADR tax relief a key condition which must be met is the requirement that the shareholder has held at least 5 per cent of the ordinary share capital and voting rights in the company for at least two years before the disposal takes place, as well as either 5 per cent of profits that are available for distribution and assets on winding up the company or 5 per cent of disposal proceeds if the company is sold.
Sometimes an unexpected dilution of equity can arise and if a company has more than one class of shares family members may unwittingly fail to hold the critical 5 per cent thresholds. Therefore, it is recommended that family shareholdings and group structures are reviewed at least two years before a sale is contemplated to check if adjustments are needed.
For larger corporate sales and for serial entrepreneurs, consideration should also be given to sharing value around family members well in advance of a sale to ensure that BADR availability is maximised where the proceeds exceed the individual £1m lifetime limit.
:: KellyAnne Murtagh (kellyanne.murtagh@aab.uk) is senior tax manager at FPM Accountants Ltd (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
