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George Bull
Head of Tax
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Tax planning

Tax partner Tim Fussell explains that in uncertain times, financial arrangements that were once tax efficient may look less attractive.

Read more about tax planning in uncertain times

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    There will frequently be several facets to every tax decision. To see how the questions around tax all fit together, ask us. We have experience, knowledge and understanding of taxation and appreciate the needs of both business and personal clients.

Fair shares

Head of Tax, George Bull, talks about the tax planning measures to consider well in advance of exiting your business.

When you sell a business, you’ll pay tax on the gain. Capital gains tax (CG T) is currently charged at 18%, but could well rise after the next Budget. However, planning ahead can cut your liability.

The base cost effect

When you sell a business, CG T is calculated on the difference between the ‘base cost’ of the shares or assets and the value achieved when they're sold. A low base cost will mean a bigger profit and a higher tax bill. A high base cost reduces the gain and, therefore, the amount of tax charged.

When a company is created from an unincorporated entity (say, the business of sole trader), the way the transition is carried out can have a major impact on the base cost of the company’s shares. If you sell or give the business assets to the new company, the base cost is likely to be low, but if you exchange the entire business for shares, the base cost of the shares will generally be higher.

You should take advice on your route to incorporation, as any future CGT liability is just one consideration.

Entrepreneurs relief

A second way to cut CG T is to claim Entrepreneurs Relief. For those who qualify, CG T is charged at just 10% on up to £1 million of lifetime capital gains on qualifying business disposals. To qualify, you must be a director or officer of the company, holding shares that entitle you to at least 5% of company's capital and voting rights. The relief applies to asset disposals on or after 6 April 2008. The £1 million figure is the lifetime allowance, not a threshold applied to each transaction.

The amount of tax charged will also be affected by the deal structure. If payment is made in instalments, the CGT owing on the full amount will be payable straight away. But if the deal involves an initial payment with additional consideration based on performance, tax is payable on both the actual cash and the amount the vendor may expect to receive later, followed by adjustments when those "earn-out" payments arise. It's wise to seek advice before agreeing the deal structure.