Tax has a huge influence on how much cash owners walk away with following a business sale. When it’s planned in the right way, you could keep as much as 90 per cent of your sales proceeds. But if it’s overlooked, HMRC payments could take as much as 60 per cent of the sale value.
The earlier tax planning starts, the better the likely exit outcome. The optimum time to begin discussions is three years before a sale. Here we set out three key areas owners should think about if they are to maximise their cash on exit.
1. Smart tax relief
There are many tax relief opportunities that can significantly reduce liabilities on exit, but owners must understand the rules if they are to fully realise the benefits.
Entrepreneurs’ Relief, for example, allows owners to reduce their capital gains payments, although it’s only available on gains of up to £10m. Family members, friends or colleagues can, however, make separate claims, significantly reducing the overall tax bill following a sale. Proper planning is key - to qualify for the relief, arrangements must be in place for at least 12 months before sale completion.
2. Efficient incentivisation
Often managers need to be brought in or incentivised ahead of sale. Many exiting owners promise successors a cash bonus on sale completion, but this is one of the most inefficient ways to motivate new recruits. It is a lose/lose situation: the business is liable for National Insurance payments on the sum, while employees face substantial tax payments (potentially at full income tax rates).
Approved employee share schemes, such as the Enterprise Management Incentives, can offer a more efficient route to incentivise new or existing employees. Share options must be granted at least one year ahead of the sale if the business and employees are to benefit from the most preferential tax rules.
3. Minimise inheritance tax
Shares in most trading businesses will be highly efficient for inheritance tax, often qualifying for 100% relief on the death of a shareholder. However after a sale those shares are replaced with cash. In the absence of other planning, if a business owner dies while still holding value from a sale – in cash or investments – their beneficiaries could face an inheritance tax bill of up to 40 per cent. Ahead of a sale, owners may choose to put a portion of shares in trusts for family members. This can often prove a highly efficient route to ensure sale proceeds end up in the right place while mitigating future inheritance tax liabilities.