Dear Reader,

On 22 June the Chancellor announced that entrepreneur's relief (where CGT is paid at 10%) was increased to £5 million of lifetime gains. This, and the feeling that sale prices will not be rising soon as the difficult economic climate continues, is expected to lead to more company sales in the coming 12 months.

If this causes you to think about selling then one of the first questions to consider with your advisers is whether to sell your company's shares, or the business and assets it owns. Your buyer will have aview on this, of course, and there will be tax issues for both of you, as well as non-tax considerations. This month we give some guidance on this important decision.

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Best wishes

James Hunt and the team at Everyman

Selling your company – or just your business?

If you own a business carried on through a company and decide to sell, should you sell the shares in the company, or just sell the business assets? The right answer will often be dictated by tax considerations, but there are also legal and administrative issues…

Non-tax considerations

Risk

With an asset deal the only liability you may inherit is employee liabilities. If you buy shares, however, you buy a company ‘warts and all'. There could be serious unknown and unquantifiable liabilities, including tax, uninsured risks on past contracts, liability risks for defective or dangerous products, or uninsured negligence claims.

Even warranties will not protect against the seller's insolvency, his disappearance overseas, or a liability which is discovered after the warranty period. Also, don't underestimate the management time and professional costs of dealing with unexpected liabilities.

The costs (legal, due diligence and so on) for a share sale can be prohibitive, so for smaller transactions (certainly under £500,000) you may opt for an asset rather than a share deal.

Third party consents

On the other hand, you need to secure third party consents for an asset deal, for example from the landlord of leasehold premises occupied by the seller. This may in turn lead to requests for rent deposits or personal guarantees from directors of the buying company. There may also be important trading agreements with suppliers or customers which will need to be renegotiated.

Administration

In a share sale all assets and contracts transfer without formality, where in an asset purchase transferring these may cause a lot of work for the buyer.

Tax considerations for sellers

When you sell company shares, you may have to pay Capital Gains Tax at up to 28% under the new rate announced by the Chancellor. However, if you have been a director or employee of the company for at least a year, and hold at least 5% of its share capital, you may also be entitled to ‘entrepreneur's relief'. Then you only pay tax at 10% on the first £5m of lifetime gains, and are entitled to an annual CGT allowance (currently £10,100).

If the assets are sold by the company there may be a double tax charge: corporation tax on the goodwill and then tax for the shareholders when the cash is taken out of the company: ask your tax adviser to calculate the different tax costs.

Tax considerations for buyers

When buying shares in a company, you pay 0.5% stamp duty, whereas on an asset deal if land is included, stamp duty land tax at rates of up to 4% may be payable. If you buy intangible assets (eg goodwill, trademarks and know-how), you may be able to claim significant tax relief.

We can help!

We'll be very happy to talk you through the options and help you find the best way forward. If you'd like further information please contact us by phone on 0845 868 0962, or by email: james.hunt@everymanlegal.com.