PRACTICE BRIEFSBUYING AND SELLING A BUSINESS OR COMPANY

BUYING A BUSINESS FROM A SOLE TRADER OR A PARTNERSHIPThe buyer could either offer cash or, if the buyer is a company, it could also offer its own shares or loan stock, or any combination of these.

Capital gains taxThe seller is chargeable to capital gains tax (CGT) on the sale of each chargeable asset of the business.

The seller may be able to claim CGT entrepreneurs’ relief, rollover relief or reinvestment relief, subject to various conditions.

Income taxWhen a sole trader or partnership sells a business, they are taxed on the same basis as if the business had ceased to trade.

Losses

• The seller might be entitled to terminal loss relief if the business has made a loss before being sold.

• If the business is a new venture for the buyer (rather than an addition to an existing business), any losses made in the first four years of assessment can be offset against other income in the previous three years. • Another option for both buyers and sellers is to set losses arising in a particular year of assessment against total income of that year. Any excess is available to set against capital gains (subject to detailed rules).

Stock

The price agreed for stock and work-in-progress at the date of sale is included in ‘sales’ in the final accounts of the seller. The buyer can claim the cost in ‘purchases’ in the first year.

Stamp duty land tax and stamp dutyTransfer of property is liable to stamp duty land tax (SDLT) normally on the consideration paid. Stamp duty is charged at 0.5 per cent on the transfer of shares and marketable securities. The duty is payable by the buyer.

Value added tax Value added tax (VAT) is normally payable on taxable supplies made by a VAT-registered business, and this includes the transfer of most assets on the sale of the business. Assets such as cash, debtors and investments are not normally liable to VAT. No VAT is payable on the sale of a going concern. This is a sale where the assets transferred are used by the buyer in the same kind of business as that carried on by the seller.

Offer of sharesA company buying a business owned by a sole trader or partnership has the option of offering shares for a business as well as or instead of cash. There are two main ways in which shares can be offered:

This factsheet is designed to be a quick, easy to read summary of the main tax issues that arise when buying or selling a business owned by a sole trader, a partnership or a company. We have also included some questions that you may want to ask to establish your clients’ needs.

For a more detailed account of the taxation issues when buying or selling a business and some test questions, please see the full chapter included in your Practice Briefs pack.

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y Route A – the purchasing company may offer shares in exchange for the business.

y Route B – the purchasing company may offer shares in exchange for shares in a company owning the underlying business. Under this route, there are two steps:

» Step 1, the seller (sole trader or partnership) incorporates a company (Newco) and transfers the business and assets into it.

» Step 2, the seller exchanges the shares in Newco for shares in the acquiring company.

With both routes, CGT can arise on the chargeable assets in the same way as if they had been sold for cash. With route A, the seller can claim entrepreneurs’ relief. With route B, any gain can be deferred until the disposal of the shares in the purchasing company.

Loan stockThe purchasing company might offer to pay some or all of the purchase price by way of a loan or loan stock, as an alternative to offering cash or shares. The tax is payable at the normal due date relating to the date of sale, even though the loan might not be repaid for some time.

1) Have you considered preparing your business for sale from a tax point of view? If you fail to qualify for entrepreneurs’ relief, you could end up paying 28 per cent tax on the gain, rather than just 10 per cent.

2) Do you keep full and complete business records? For example, does your company identify research and development costs sepa-rately? There are attractive tax reliefs for revenue expenditure.

3) After the sale of your business, do you have further business plans? It may be possible to roll over any capital gain on the sale into other assets.

4) Have you considered EIS (the enterprise investment scheme) as a way to defer a capi-tal gains tax liability? It could be worthwhile, but you need to take great care with such risky investments and obtain competent specialist advice.

5) If you are considering the purchase of a busi-ness, have you received professional help with the investigation? If you are selling, have you

received advice on the accounting and other preparations for making the business easier to sell?

6) Have you made any other capital gains in the same year as the sale of your business?

7) Have you considered expanding your busi-ness by buying another business rather than by growing it from within?

8) Have you considered how you and your spouse/partner could share the ownership of the business and other assets? Is there any scope for your spouse/partner to work in the business?

9) There are potential tax savings to be achieved from trading as a limited company. Would you consider incorporation before selling your busi-ness/after buying your business?

10) Does the business you are buying/selling have any losses? There are many opportunities for relieving losses, but there are also some pitfalls.

PRACTICE BRIEFSBUYING AND SELLING A BUSINESS

USEFUL QUESTIONSListed below are some questions you may find useful when talking to your client about buying or selling a business

ACTION: “We can help you with regards to buying and selling a business. Let’s arrange a no-obligation consultation to find out how.”

This has been produced for general guidance only. The publishers can accept no liability for any loss made as a result of actions taken or not taken as a result of relying on information contained in this publication. © Taxbriefs Ltd and PracticeWEB August 2012. Information correct at time of going to press.

BUYING A BUSINESS OWNED BY A COMPANYThere are two main ways to buy a business owned by a company.

Buy the business from the companyBuy the company’s business and its assets. The seller company is chargeable to tax on capital gains on the sale of each chargeable asset of the business. If the gains made by the company are distributed to the shareholders, the shareholders will usually be liable to further tax.

Buy the shares in the companyBuy the shares in the company for cash, or, if the buyer is a company, for an issue of its own shares or loan stock. The seller’s capital gain arises on the sale of the shares. In practice, there might be several shareholders, who must calculate their own gain or loss under the usual rules. There is no rollover relief on the sale of shares, but reinvestment relief under the EIS or SEIS might be available to individual shareholders. Entrepreneurs’ relief may be available on a sale of shares in a trading company.

A company will normally still be carrying on the same business after a sale of its shares, and so its tax position will generally not change.

There is no transfer of the business for VAT because the business remains in the company, unless the company is part of a group VAT registration.

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