A tax free company sale?
Until now the best that could be hoped for when selling your a company would be to qualify for the 10% rate of capital gains tax (‘CGT’) under the Entrepreneurs’ Relief rules. Once the Autumn Finance Bill is enacted, there will be an exciting new opportunity for you to make a tax free company sale, provided you have the correct pieces in place.
First a word of reassurance – this is no tax avoidance scheme. It is a result of the recommendations received following a consultation process started by HMRC in 2016 into the ‘Substantial Shareholdings Exemption’ or ‘SSE’.
There are conditions, of course, and this means that it will not be something that everyone will be willing and able to do. In order to know if this is right for you, you need to start at the end by asking the critical question: If and when I sell the company what will I do with the proceeds?
Most of my clients would answer that by saying that they want the proceeds for themselves, in their own name, and a few of them do want to spend it on personal items, pay off their mortgage or buy a holiday home. The new SSE rules will work a treat where the proceeds are going to be invested for you to live off the income.
Quite a few clients already have the right structure in place, for other commercial reasons. Suppose your company is making profits and accumulating ‘surplus’ cash and you want to protect it from the inescapable risks of running a business.
One solution is to have a holding company. You pass the cash up tax-free by way of a dividend, and the holding company can invest in whatever works best for you.
Your holding company can now sell the trading subsidiary tax-free because of SSE. Your holding company becomes a pure investment company, and you draw income out as dividends, much as you did before.
And it won’t be a problem if you do decide to pocket the proceeds after all. Either you demerge the subsidiary before the sale (subject to all the relevant clearances) or you wind the holding company up after the sale. You will want to be able to claim Entrepreneurs Relief here, i.e. to pay 10% CGT, and, therefore we would need to make sure that you meet all the conditions, in particular, that the non-trading elements of the group have not become significant.
This strategy can be adapted easily to fit where there are a number of company owners. Please get in touch if you would like to find out more about protecting your accumulated profits, securing a tax free company sale. or more generally about the benefits of group structures.