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In most (but by no means all) cases, when selling a business, a seller will want a share sale (the shareholders are the sellers selling their shares in the target company) rather than an asset sale (when the target company is the seller selling its assets). This decision is usually driven by tax considerations and the generous tax reliefs available in respect of share sales.
This can give rise to a form of “double taxation”. First the company has to pay corporation tax on the sale proceeds. Secondly, in order to extract those post-tax sale proceeds, the shareholders may (depending on exactly how they do it) have to pay capital gains tax or income tax. For these reasons a share sale is often preferred when selling a business.
Subject to satisfaction of certain criteria, e.g., having held at least a 5% shareholding for at least a year and been a director or employee of the company, a selling shareholder should qualify for entrepreneurs’ relief and pay capital gains tax on his/her gain at the relatively low rate of 10% (this compares very favourably to 40% or more if income tax applies).
The difference in the amount of tax payable on a share sale as opposed to an asset sale often means a seller will accept a lower price and this in itself may persuade a buyer to go along with a share sale even though a share sale is more complex, riskier and expensive in terms of legal and accountancy fees for a buyer. I explain some of the tax issues facing a buyer in my article Buying a Business: Tax Issues.
MyBusiness Partner: here for your business at every step.
Peter Mardon, Corporate Partner WSP Solicitors
For further information please contact Peter on 01452 429875, or via email: petermardon@wspsolicitors.com
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