You’re leading a rapidly-scaling, entrepreneurial business.
Operational challenges that go hand-in-hand with growing a company mean there are never enough hours in the day.
Whilst the idea of selling up and reaping the rewards remains a distant prospect, the tax bill that may accompany it is unlikely to be the thing that keeps you awake at night.
A lack of early focus on tax planning, however, can end in a shock when HMRC takes more than you expected, or a potential buyer identifies issues during the due diligence process.
We’ll explore the latter in a future instalment in this series and cover the basic steps to ensure you protect your sale from any tax compliance missteps; be they PAYE, Corporation Tax or VAT related.
When it comes to managing your own tax liabilities, there are numerous reliefs available and pitfalls to avoid. It can seem overwhelming, but it’s never too early to start the planning process and consult with ourselves or another experienced tax adviser.
Leaving it too late can see it slip down the priority list, vying with legal and due diligence concerns – you may even miss out on the qualifying period for certain reliefs.
Our top four tips to make sure you pay the right amount and don’t overpay tax are:
Ensure Entrepreneurs' Relief eligibility
This can offer a significant saving, reducing the rate of capital gains tax from 20% to 10% on the sale of company shares – but only if multiple conditions are met.
For example, until the recent Budget on 29 October 2018 (see below) the person selling had to have been an employee or officer of the company, and to have held at least 5% of the shares and votes for as a minimum the 12 months leading up to the date of sale. The company must also qualify as a trading entity.
With a current lifetime limit of £10 million per individual, it’s an incredibly valuable relief that could net you up to £1 million in savings.
There are other conditions and it’s important that they are all met for the qualifying period (see further below).
Keep it in the family
Attentive readers will have noted above that Entrepreneurs’ Relief is per individual – not per business.
If you have family shareholders employed in the company, make sure they meet all the relevant conditions for the qualifying holding period. Similarly, if not directly involved in the day-to-day operations, family members need to be valid officers or employees of the company to have the same eligibility, even if they’ve held their shares for longer than the qualifying period.
You may also want to consider your overall inheritance tax exposure – generally the value of shares in a trading company would qualify for reliefs which won’t be the case when that value is converted into cash as a result of the sale.
Incentivise your talent tax efficiently
As we pointed out in episode one of this series, a dynamic management team is key to growing a business.
In order to attract the right talent, and keep them motivated to grow the value of the business ready for sale, it may make sense to give them shares.
A cash bonus on completion sounds good on paper – but the tax impact makes the reality much less rewarding.
An Enterprise Management Incentive (EMI) HMRC approved share option scheme is one popular way to do this. Implemented correctly, your management team may also be able to claim Entrepreneurs' Relief on a sale of shares after exercising their options and the company can also benefit.
It’s important to incentivise the team early on, before a business is too far along its growth trajectory.