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12/16/2019
1
Key tax considerations on selling
a company (2019)
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LexisNexis® Confidential 2
The law as stated during this webinar is
up to date as of 16th December 2019
Key tax considerations on selling
a company (2019)
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Introduction
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Contents
• Third party sale
o Planning for a sale
o Initial offer
o Sales process
o Taxation on sale
• Succession planning
o Purchase of own shares
o Management Buy Out
o Employee Ownership Trust
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Director
Saffery Champness
Andrew Smith
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Stage 1 –Preparing for a sale planning
• Restructure shareholdings
o Maximising Entrepreneurs’ relief (10% CGT rate) or SSE (exempt gain)
o Transfers to wife/children who work in the business
o Can potentially be achieved with no tax cost – spouse exemption/gift relief
o Sell shares to a trust?
• Put in place employee/management incentive plans
o EMI/CSOP/Growth shares
• Consider what assets are to be retained by the seller
o Demerger to split sale and non-sale assets
o HMRC approval in advance of transaction
o Can potentially be achieved with no tax cost
• Consider Non-domiciled or non-resident status of seller
o Emigration of seller pre sale
o Use non-UK situs assets
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How soon and how certain?
Issue Timing (prior to sale) HMRC clearance or pre-
approval*
• ER • Ideally 24m, can be
sooner
• Yes (part)
• Carve out assets • Ideally 12m+, can be
sooner
• Yes
• Last minute share
incentives
• Ideally 6m, can be
sooner
• Yes
• Non-UK domicile vs non-
UK residence
• Ideally 12m, can be
sooner
• No
• Plan early
• Consider vendor due diligence
* Statutory clearance, business or HMRC pre-approval on valuation or option
scheme design.
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Vendor tax due diligence/Health check
• Health check/Vendor die diligence
o Identify potential risks now
o Review of historical planning undertaken
o Identifying tax issues that may impact the overall price
o Making disclosure to HMRC in advance of undertaking planning
o Alternative to disclosure – consider warranties/indemnities
o Timescales to resolve with HMRC prior to transaction – 2 to 6 months
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Stage 2- Initial offer
• Who might buy the business?
o Trade buyer
o Private Equity/Venture capital fund
o Existing management (Stephen to discuss)
• Heads of Terms/Letter of Intent
o Sale consideration (shares/loan notes/cash/share options)
o Negotiate value for tax assets (i.e. EMI options/brought forward losses)
o Can buyer purchase cash (so pay 10/20% CGT)?
• Earnout/deferred consideration
o Want it taxed as a capital receipt
o Management required to remain in the business
o Consider loan notes for deferred consideration
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Stage 3 - Sale Process
• Purchaser due diligence
o Management & company’s advisors provide tax information
o Identify risks in advance (see stage 1)
o Plan to have all documents available (create a dataroom now)
• HMRC advance clearances
o Transactions in securities
o Rollover relief (shares/loan notes)
o Non-statutory clearances
• Sale and Purchase Agreement
o Review warranties/Indemnities/Tax covenant
o Disclosure against the warranties
o Are value of tax assets included (i.e. EMI shares on exercise)?
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Stage 4 – Taxation on sale
• Basic position – cash proceeds
o Seller pays capital gains tax on cash sale proceeds (10/20% CGT)
o Corporate seller – Substantial Shareholding Exemption or corporation tax
o Purchaser 0.5% stamp duty
o Residence/ domicile of sellers
o EMI option holders should also pay 10% CGT (on basis ER is available)
• Non-cash consideration
o Shares received in purchaser (possible to defer gain until future sale?)
o Loan notes (QCB/non-QCB) (possible to defer or rollover gain until redemption/sale?)
o Earnout (ascertainable vs unascertainable consideration)
• Elect out of rollover relief
o Bank ER (10% CGT)
o Consider tax payment dates and cash flow
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Stage 4 – Taxation on sale (other issues/pitfalls)
• Non cash-consideration
o Interest received on loan notes liable to income tax
o Interest relief on borrowings to purchase shares in purchaser
o Rollover (don’t cash in cash out)
o Vesting criteria for shares
• Employment related securities issues
o On sale any risk of income tax charge on sale?
o Section 431 elections on share issues
• Other issues
o Payment of professional fees
o Don’t resign directorships before sale
o Anti-dilution rules
o Compensation payments
o Payment under tax covenant or breach of warranty
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Partner
Menzies
Stephen Hemmings
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Succession Planning
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Share Buy Back
• Advantages
o Facilitates retirement of main owner and hand over to incumbent management/family
o Direct purchase often impractical due to lack of personal funds
o Any purchase/borrowing likely to be repaid from income extracted from the company so expensive
o Buy back allows company to fund and repay borrowing out of cashflows
• Key legal requirements
o Distributable reserves
o Immediate payment
• Stamp duty
o 0.5% payable by company
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Share Buy Back - Conditions for capital treatment
• Company
o Unquoted trading company or holding company of trading group
o Purpose of benefiting company’s trade
o HMRC interpretation SP2/82
• retain ‘sentimental stake’
• resign from directorships
o Not part of a scheme to avoid tax
• Shareholder
o UK resident
o 5 year ownership by seller/ spouse
o Must dispose of all shares or ‘substantially reduce’ proportionate shareholding – trade benefit?
o Can’t be connected immediately afterwards (including associates)
• Connection = 30% of issued ordinary share capital or loan capital and issued share capital or voting power
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Share Buy Back - Practical considerations
• Phased share buy back
o Are financial reserves/resources available?
o Need to pass substantial reduction and connection test at each point
o Bear in mind shares bought back and immediately cancelled
o Agreed buy out programme for benefit of trade rules
• Unconditional multiple completion buy back
o Give up beneficial ownership – legal completion in tranches
o No dividends or exercise of voting rights
o Voting rights question – convert to non-voting?
o Recent ER challenge
• HMRC
o Advance clearance
o Post transaction reporting
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Management Buy Out (MBO)
• Typical structure
o Newco acquires existing business
o Key management succeed exiting owner
o Reward next level
• Advantages
o Flexibility
o No need for reserves or immediate cash
o Consideration can be part funded out of future profits
o Less complexity around obtaining CGT treatment
• Funding
o Cash reserves/ property sale
o Third party financing/investment
o Deferred consideration
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MBO – Tax analysis
• Equity in topco
o New management buy in
o Rollover for existing - tax neutral - s135 provisions
o SD charge at 0.5%
• Exit and dilution
o Cash
o Deferred consideration/loan notes
o Contingent consideration
o Facilitates future equity schemes
• Anti-avoidance
o Transactions in securities provisions
o Income tax avoidance
o Fundamental change of ownership
o Commercial reasons
o Tax clearance for s137 TCGA 1992 and s701 ITA 2007
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Employee Ownership Trust - EOT
• Background and objectives
o Around for 5 years
o Inspired by ‘John Lewis’ model
o Secures independence
o Controlling interest held in Trust for benefit of all employees
• Potential benefits
o Provides all employees with stake in business
o Practical solution where no third party purchaser or MBO option?
o Tax free disposal for controlling shareholder
o Income tax free bonus for all employees on annual basis
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EOT – CGT exemption
• Requirements for tax exemption
o Trading requirement
• Trading company or group. Not ‘to a substantial extent’ non-trading activities
o All employee benefit requirement
• All eligible employees – not ‘Excluded Participators’ – general aim to exclude sellers and their connected persons from being a beneficiary
o Equality requirement
• Generally all persons on same terms
• Amount of award can reference remuneration/hours worked/length of service in some circumstances
o Controlling interest requirement
• More than 50% of ordinary shares, rights to profits on distribution and assets on winding up
o Limited participation requirement
• Ratio of participators benefiting from exemption/employees must not exceed 40%
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EOT – Tax exemptions and practical considerations
• Disqualifying event
o In tax year following the tax year in which disposal takes place
o Clawback upon trustees of EOT – treated as disposed and reacquired at market value on date of Disqualifying Event
o Indemnities from vendors/ cross indemnities
• Practical considerations
o How is consideration funded?
o Who is leading and driving the business going forward?
o Can management be incentivised with minority shareholdings? – EMI carve out
o Flexibility to sell out in future if in business interests?
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Thank you and reminders
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