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Strategic Business Exit – Maximising your Legacy
Hoxton Tax • Strategic Business Exit – Maximising your Legacy
Strategic Business Exit – Maximising your Legacy
Planning your exit from a business which you have successfully built isn’t just about finding the right buyer, it is also ensuring that you keep as much of your well-earned proceeds as possible.
Using reliefs such as Business Asset Disposal Relief and the Substantial Shareholdings Exemption can significantly enhance the tax efficiency of your business sale and be the difference between a good exit and a great one.
However, these reliefs are not automatic. Careful consideration needs to be given to shareholding structures, trading status and timing to ensure that the relevant conditions are met and relief is not inadvertently lost.
Under current tax rates, the standard Capital Gains Tax (CGT) rates sit at 18% and 24% depending on if you are a basic rate taxpayer or not. Without proactive planning, you may end giving near a quarter of your proceeds to HMRC, effectively working for free for almost 5 years out of a 20-year business journey.
For those considering a move overseas, the opportunity can be even greater. With careful planning, it may be possible for no UK tax to arise on the sale of a business, depending on your residence position at the time of disposal.
How does this impact you?
Business Asset Disposal Relief (BADR) gives relief of 6% to each individual below the respective allowance. For larger sales, an inter-spouse transfer prior to a sale could double the allowance available creating further tax savings.
Timing of any transfer prior to a sale is important with ownership periods required, amongst other criteria, to satisfy the eligibility for the relief.
Whilst most reliefs require at least a 12 or 24 month holding, there are ways of structuring the payments to defer tax or even exempt it based on future actions.
Where all of the proceeds are not required up front, utilising earn-out conditions or restructuring debt can help to reduce the immediate tax burden to a future time.
Through forward planning, a corporate entity may be restructured to create a subsidiary containing a specialist element of a business highlighted for a future sale. The separation of trading activities into a group of companies allows businesses to be more flexible in which parts the owner wants to keep and which they may sell.
The use of a holding company to hold the shares allows for the sale of a company tax free, deferring ant tax until a later event. Forward planning is essential as an ownership period is required along with other criteria.
Whilst substantial shareholdings exemption (SSE), exempts the company from tax, it merely defers it for an individual taxpayer. SSE is usually utilised by entrepreneurs looking to pivot into new ventures, or use the funds as a phased retirement, similar to a pension with structured dividends over several years.
It is important to consider the time you are going to spend outside of the UK. If you take out a dividend from a UK company and then return within 5 years, then you will be subject to UK tax in the year you return. The same applies for any capital gains generated on the sale of the business.
The UK does not have a formal “Exit Tax” currently in place when an individual leaves the UK. There are however charges for a company moving its residency away from the UK, and this could cause a headache for a taxpayer looking to sell it whilst non-resident.
It is important to make sure that any movement of a shareholder, or the planning of such an exit is carefully structed to avoid any UK tax traps that could be triggered.
Why Hoxton?
When exiting a business that you have worked hard to build, it is important to plan your exit. Hoxton will help you create a flexible road map for a future sale that is balanced between being tax efficient and allowing you to achieve your commercial goals.
We help clients:
- BADR and SSE Analysis - Reviewing structures to ensure relevant holdings, ownership periods and trading status requirements are met.
- Pre-Sale Grooming – Cleaning the balance sheet to satisfy "trading" requirements for BADR and SSE.
- Anti-Forestalling Advice: Ensuring any sale isn't caught by rules designed to block "artificial" 2025/26 year-end disposals.
- EOT Transitions - Comparing a 0% CGT sale to an Employee Ownership Trust against a trade sale.
- HMRC Clearances - Securing "Advance Statutory Clearance" so you have certainty before the deal is signed.
Case Study: Separation of Trading Activities for Exit
Tobias owned a UK tech company with two distinct products and services offered. As part of his futures plana Tobias wanted to sell the diagnostic element of the business and keep the development services, so he could look into new ventures. A direct sale would have triggered a large capital gains tax bill which Tobias wanted to avoid.
Hoxton Tax analysed both elements of the business and put together a plan for separating to two trading activities within the company. The diagnostic activities were demerged into a new subsidiary that sat underneath the current company and interacted with HMRC to get the necessary clearance.
With 12 months having passed since the demerger, and ensuring all the requirements for SSE were satisfied, Tobias sold the subsidiary company entirely tax-free within the holding company. This allowed Tobias to maintain the development services of the business and utilise the proceeds of his sale in new ventures saving £480,000 in capital gains tax.
How Can We Help You?
If you would like to speak to one of our advisers, please get in touch today.
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