Tax Considerations when Selling a Business

Tax Considerations when Selling a Business

Generally speaking the sale of a business will take place either by way of an asset or a share sale (if the business is operated out of a company).  A sale of a business can also take the form of a hybrid between the two where the business is operated from a company. In such a situation a ‘hived-down’ form of the seller’s business –often a part of the business only with the assets the purchaser would like to buy- is transferred to a ‘new’ company and the shares in that company are sold to the purchaser.   If the business is operated through a partnership an asset sale is the only way in which a sale can be effected.

Deciding whether to structure a business sale as an asset sale or a share sale is complicated because the parties involved benefit from opposing structures. Generally, buyers prefer asset sales, whereas sellers prefer share sales. This article deals with the tax considerations of each of the three forms of sale from a Seller’s perspective.

Share Sale

  1. In a share sale, the buyer acquires the legal entity that operates the business. Currently, in a share sale, taxation of a seller’s gain is relatively simple: capital gains tax only is charged (currently at 33%) on the difference between the sale price and the purchase price of the shares.  A number of reliefs such as retirement relief may operate to reduce the overall capital gains tax payable in whole or in part.  As far as the Seller is concerned a Share Sale is the most straight forward transaction from a tax perspective.

 

  1. Generally speaking if the seller is an individual looking to exit a family business or retire for example, his/her objective will more than likely be to maximise the amount of cash s/he will receive from the business immediately after the transaction. A seller in such a situation will therefore be less likely to wait for the benefit of any tax losses which could be generated in an asset sale to materialise. In those circumstances the seller will generally look for the sale proceeds to be paid to him/ her directly by way of consideration for his/her shares so as to avoid double taxation which would generally arise on an asset sale.   A share sale will require increased tax due diligence on the part of the purchaser which could delay a sale and this is something that may be a material consideration for either or both parties.

 

  1. The tax charge on a share sale may be lower than on an asset sale if there is a higher base cost in the shares. Generally this will apply where the Seller first acquired the shares in the target company via a share purchase or post-incorporation subscription (i.e. a purchase) when the company had a value, rather than the original subscription on incorporation of the company.

 

  1. Generally speaking, the warranties that are required by a purchaser in a share sale are more extensive than those which may be required in an asset sale. Tax warranties are representations a seller makes to the purchaser in respect of the current and historic tax affairs of the business and should any of them prove to be untrue during a period certain (to be agreed) after the sale completes, the purchaser is entitled to damages from the seller once it can prove loss which generally is proof of a reduction in share value.  In a share sale a seller will need to give warranties in respect of every tax relating to the operation of the business whereas in an asset sale a seller can generally limit the warranties (and his/her liability) to the specific taxes that relate to the assets in question.

 

  1. Again, generally speaking in a share sale transaction a purchaser will require an indemnity from the seller in respect of every tax which could potentially relate to the business transaction within a certain period of up to five years (but usually 2) after the sale completes. An indemnity is different to a warranty in that it is an agreement by the seller to reimburse the company (i.e. not the purchaser) in respect of a particular liability should it arise.  In brief, an indemnity is not dependent upon proof by the purchaser that the market value of the shares at the time of the transaction would have reduced in value had the particular eventuality came to light.  Indemnities in share sale transactions will be a relevant consideration for sellers of long-established businesses engaged in significant and complex financial transactions where the potential for undisclosed tax liabilities to come to light after the sale is high.

 

Asset Sale

  1. In an asset sale by a company, ownership of the shares does not alter. The buyer purchases individual assets from the company.  For sellers, asset sales generally attract a higher overall tax bill because the gains on the sale of assets are first chargeable to corporation tax (currently up to 25%) in the company and, when distributed to the shareholders as a dividend, are subject to income tax (currently up to 48%).  Generally the operation of the foregoing rules motivate a seller to choose a share sale.

 

  1. Conversely, as there is less due diligence for the buyer to perform in an asset sale, the transaction can often be completed more quickly and more cost-effectively. Further, an asset sale has less chance of falling through as a result of an unexpected glitch during due diligence (and such “glitches” are not uncommon in share sales!).

 

  1. The tax calculation can be quite complex for asset sales as different categories of assets may have to be treated differently for tax purposes. If on a capital asset the seller has claimed capital allowances, for example, and then sells the asset for more than the book value, he may be liable to pay a “balancing charge” to Revenue which would ultimately reduce the net cash benefit the seller receives from a transaction.

 

  1. However as buyers sometimes prefer to buy assets rather than shares, a corporate seller can often negotiate a higher value for an asset sale than a share sale. The rationale for the foregoing being that there is value when a corporate seller retains the responsibility (and cost) of clearing liabilities and tidying up post-sale.

 

  1. An asset sale may trigger losses and/or balancing allowances in the seller company which can be utilised by the seller company after completion of the asset disposal.

 

  1. A share sale may sometimes not be practicable for a seller group of companies if a sale of the target company would ‘break’ a group and trigger a clawback of a previously-claimed group relief such as Capital Gains Tax group relief or the ‘associated companies’ exemption from stamp duty. An asset sale may provide a solution in these circumstances.

Sale of Shares in a ‘hived-down’ Structure

  1. A hive-down structure is a half-way between a sale of shares and a sale of assets. In this situation a corporate seller transfers particular assets to a new subsidiary (or ‘newco’), and the buyer purchases (the shares in) newco. The buyer gets a company holding the assets it wants with a short tax-history and pays stamp duty at 1% for the shares. The potential issues for a shareholder regarding double taxation could explained at paragraph 1 above under the heading ‘asset sale’ could arise however.

 

  1. It is possible for a seller company to transfer assets to a new subsidiary without giving rise to a chargeable gain for CGT (provided it is a 75% subsidiary); VAT (where it is the transfer of a business or part thereof) or stamp duty (provided there is a 90% group relationship between company and subsidiary).

 

  1. Points mentioned above in respect of share sales above are also relevant tax considerations for a seller in a ‘hived-down’ structure.

 

As you will see from our last article “Tax Considerations When Buying a Business” there are many competing objectives from a tax perspective for both a buyer and a seller in a business acquisition or sale.  The issues can be extremely complex and careful and early advice is strongly recommended to anyone thinking of selling the entire or part of their business.

An experienced solicitor can assist a seller in many ways in a business sale transaction.  Whilst it largely depends on the client’s objectives in any situation, an experienced solicitor could assist a seller in reducing his/her potential liability to a purchaser in respect of historic tax affairs of his/her business, by ensuring the seller structures a deal so as to minimise the amount of tax ultimately payable by him/her and by facilitating a seamless transition of the business as a going concern to the new owners and ensuring all relevant documents have been filed in the Companies Registration Office after completion.

NOTE:   This article does not deal with the Transfer of Undertakings Protection of Employees (TUPE) regulations.  These will be dealt with in a separate article shortly.

If you would like further information in relation to any of the above please contact Deirdre Farrell by email on deirdre@amoyssolicitors.com, or telephone:  01 213 59 40 or your usual contact at Amorys.

The content of this article is for information purposes only and is not intended to be legal advice.  Amorys Solicitors is a boutique commercial and private client law firm in Sandyford, Dublin 18.