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Business Tax Planning August 2012 - Factsheet 13


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Business Tax Planning August 2012 - Factsheet 13

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Business Tax Planning August 2012 - Factsheet 13

  1. 1. Business Tax Planning: AUGUST 2012 PRACTICE BRIEFS FACTSHEET 13 BUYING AND SELLING A BUSINESS OR COMPANYThis factsheet is designed to be a quick,easy to read summary of the main tax issuesthat arise when buying or selling a businessowned by a sole trader, a partnership ora company. We have also included somequestions that you may want to ask toestablish your clients’ needs. For a more detailed account of the taxation issues when buying or selling a business and some test questions, please see the full chapter included in your Practice Briefs pack.BUYING A BUSINESS FROMA SOLE TRADER OR APARTNERSHIPThe buyer could either offer cash or, if thebuyer is a company, it could also offer its ownshares or loan stock, or any combination of Stock yy Route A – the purchasing companythese. The price agreed for stock and work-in- may offer shares in exchange for the progress at the date of sale is included in business.Capital gains tax ‘sales’ in the final accounts of the seller. The yy Route B – the purchasing companyThe seller is chargeable to capital gains tax buyer can claim the cost in ‘purchases’ in the may offer shares in exchange for shares(CGT) on the sale of each chargeable asset of first year. in a company owning the underlyingthe business. Stamp duty land tax and stamp business. Under this route, there are twoThe seller may be able to claim CGT duty steps:entrepreneurs’ relief, rollover relief orreinvestment relief, subject to various Transfer of property is liable to stamp duty »» Step 1, the seller (sole trader orconditions. land tax (SDLT) normally on the consideration partnership) incorporates a company paid. Stamp duty is charged at 0.5 per cent (Newco) and transfers the businessIncome tax on the transfer of shares and marketable and assets into it. securities. The duty is payable by the buyer.When a sole trader or partnership sells a »» Step 2, the seller exchanges thebusiness, they are taxed on the same basis as Value added taxif the business had ceased to trade. shares in Newco for shares in the Value added tax (VAT) is normally payable on acquiring company.Losses taxable supplies made by a VAT-registered• The seller might be entitled to terminal business, and this includes the transfer of most assets on the sale of the business. Assets With both routes, CGT can arise on the chargeable assets in the same way as if loss relief if the business has made a loss they had been sold for cash. With route A, before being sold. such as cash, debtors and investments are the seller can claim entrepreneurs’ relief. not normally liable to VAT. No VAT is payable• If the business is a new venture for the on the sale of a going concern. This is a sale With route B, any gain can be deferred until the disposal of the shares in the purchasing buyer (rather than an addition to an where the assets transferred are used by the existing business), any losses made in the company. buyer in the same kind of business as that first four years of assessment can be offset carried on by the seller. against other income in the previous Loan stock three years. Offer of shares The purchasing company might offer• Another option for both buyers and A company buying a business owned by a to pay some or all of the purchase price by way of a loan or loan stock, as an sellers is to set losses arising in a particular sole trader or partnership has the option of year of assessment against total income alternative to offering cash or shares. The offering shares for a business as well as or of that year. Any excess is available to tax is payable at the normal due date instead of cash. There are two main ways in set against capital gains (subject to relating to the date of sale, even though which shares can be offered: detailed rules). the loan might not be repaid for some time.01
  2. 2. FACTSHEET 13PRACTICE BRIEFSBUYING AND SELLING A BUSINESSBUYING A BUSINESS Buy the shares in the companyOWNED BY A COMPANY Buy the shares in the company for cash, or, if the buyer is a company, for an issue of its ownThere are two main ways to buy a business shares or loan stock. The seller’s capital gain arises on the sale of the shares. In practice, thereowned by a company. might be several shareholders, who must calculate their own gain or loss under the usual rules. There is no rollover relief on the sale of shares, but reinvestment relief under the EIS orBuy the business from the SEIS might be available to individual shareholders. Entrepreneurs’ relief may be available oncompany a sale of shares in a trading company.Buy the company’s business and its assets. A company will normally still be carrying on the same business after a sale of its shares, andThe seller company is chargeable to tax on so its tax position will generally not gains on the sale of each chargeable There is no transfer of the business for VAT because the business remains in the company,asset of the business. If the gains made by the unless the company is part of a group VAT are distributed to the shareholders,the shareholders will usually be liable tofurther tax. Listed below are some questions you may find useful whenUSEFUL QUESTIONS talking to your client about buying or selling a business 1) Have you considered preparing your business received advice on the accounting and other for sale from a tax point of view? If you fail to preparations for making the business easier to qualify for entrepreneurs’ relief, you could end up sell? paying 28 per cent tax on the gain, rather than just 10 per cent. 6) Have you made any other capital gains in the same year as the sale of your business? 2) Do you keep full and complete business records? For example, does your company 7) Have you considered expanding your busi- identify research and development costs sepa- ness by buying another business rather than by rately? There are attractive tax reliefs for revenue growing it from within? expenditure. 8) Have you considered how you and your 3) After the sale of your business, do you have spouse/partner could share the ownership of further business plans? It may be possible to the business and other assets? Is there any scope roll over any capital gain on the sale into other for your spouse/partner to work in the business? assets. 9) There are potential tax savings to be achieved 4) Have you considered EIS (the enterprise from trading as a limited company. Would you investment scheme) as a way to defer a capi- consider incorporation before selling your busi- tal gains tax liability? It could be worthwhile, ness/after buying your business? but you need to take great care with such risky investments and obtain competent specialist 10) Does the business you are buying/selling advice. have any losses? There are many opportunities for relieving losses, but there are also some 5) If you are considering the purchase of a busi- pitfalls. ness, have you received professional help with the investigation? If you are selling, have youACTION: “We can help you with regards to buying and selling a business. Let’s arrange a no-obligation consultation to find out how.” This has been produced for general guidance only. The publishers can accept no liability for any loss made as a result of actions taken or not taken02 as a result of relying on information contained in this publication. © Taxbriefs Ltd and PracticeWEB August 2012. Information correct at time of going to press.