Talking Tax - Is It A Good Time To Sell A Business

Following changes in the 2011 Budget, the tax environment surrounding the sale of a business is at its most favourable for a number of years.

Entrepreneurs relief

For individual shareholders, the most important consideration will be whether entrepreneurs relief applies reducing the tax rate chargeable on qualifying gains to 10%. Entrepreneurs relief applies on the disposal of a business or shares in a trading company or holding company of a trading group, says Jacquelyn Kimber, Business Tax Partner. For a share sale, the individual must own at least 5% of the shares and votes and work in the business.

The conditions must be met throughout the year before the sale. Following the 2011 Budget, entrepreneurs relief applies to the first 10 million of the individuals gains, making it even more important to ensure the relief is maximised wherever possible.

De-grouping

Disposals of shares by groups of companies may qualify for tax-free treatment under the substantial shareholdings exemption. This may apply to sales of shares in trading companies (or holding companies of a trading group) provided the vendor company has owned at least 10% of the ordinary share capital of the target company for 12 months.

A frequent problem when contemplating the sale of a group company was the possibility of a de-grouping tax charge, as Jacquelyn explains. De-grouping charges arise where a company leaves a group while holding a chargeable asset acquired on an intra-group transfer within the previous six years. Tax was due on the gain that would have arisen when the intra-group transfer was made, even if the sale of shares itself is exempt. The common commercial practice of transferring a business to a new company prior to sale was therefore often tax inefficient.

The Finance Bill 2011 changes the way de-grouping charges operate. An adjustment will in future be made to the consideration taken into account in calculating the gain or loss on the share disposal, comments Jacquelyn.

Exemptions applying to the disposal itself will therefore also apply to the degrouping charge. There will also be a relaxation of the 12 month ownership rule to facilitate hive downs on the sale of a business.

by: Brendan Wilde

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