As a business owner, exiting your business is one of the biggest decisions you’ll ever make. After years – often decades – of building value, relationships and reputation, managing risk and looking after your employees, the question becomes: how do you exit the business in a way that gives you the financial return you want or need, while aligning with your succession objectives?

For many owners, tax is a key part of that decision. While the exact amount payable will depend on individual circumstances, some common principles apply to most disposals.

The basics of Capital Gains Tax

The sale of shares in a UK private limited company is subject to Capital Gains Tax (CGT). Tax is charged not on the full sale proceeds, but on the gain realised – the difference between the sale price and the base cost of the shares.

Current standard CGT rates are 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers.

Every individual benefits from an annual CGT exemption, which shelters a portion of gains from tax each tax year. Any gain above this threshold is taxed at the applicable CGT rate. The annual exempt amount is currently £3,000.

In many owner-managed businesses, selling shareholders will be eligible for Business Asset Disposal Relief (BADR). Where the conditions are met, BADR reduces the CGT rate on qualifying gains to 18%, up to a lifetime limit of £1 million of gains.

To qualify for BADR, several criteria must be satisfied. Broadly, the company must be a trading company (or the holding company of a trading group), and the individual must have held at least 5% of the ordinary share capital and voting rights. In addition, the shareholder must be an officer or employee of the company, and these conditions must have been met for at least two years prior to the disposal.

Traditional exit routes and their tax implications

Business owners typically consider four main exit routes.

Trade sale

This is the option most people are familiar with: selling to a third party, often a competitor or private equity buyer.

A trade sale may secure the highest price, but buyers often require key sellers to continue working in the business for a period of time to realise full value.

CGT is payable on the sale of shares to a third party. BADR may apply to reduce the CGT rate on the first £1 million of gains to 18%; thereafter, CGT is payable at 24%.

Management buyout (MBO)

In a management buyout, exiting owners sell their shares to the company’s current management team.

This option ensures continuity of leadership and secures employees’ jobs.

The price paid for the shares may be constrained by how much funding the management team can raise, and for this option to work, there must be a management team in place that is both willing and able to take over.

CGT is payable on the sale of shares in an MBO. Where BADR is available, CGT is payable at 18% on the first £1 million of gains and at 24% thereafter.

Family buyout (FBO)

In a family business, exiting owners may wish to transfer their shares to next-generation family members. This can be structured in a number of ways, and families often consider a family buyout.

An FBO is structured similarly to an MBO, but here family members take over ownership and leadership of the business for the next generation — providing continuity and independence for the business, and job security for employees.

As with an MBO, CGT is payable on the sale of the shares. Where BADR is available, CGT is payable at 18% on the first £1 million of gains and at 24% thereafter.

Employee Ownership Trust (EOT)

In this option, exiting owners sell at least a majority of the shares in the company to an employee ownership trust for the benefit of the company’s employees.

Transferring shares to an EOT ensures continuity and independence for the business over the long term. It also provides job security for employees, a voice in the future of their organisation, and an opportunity to share in the profits they help to create.

CGT is payable on the sale of shares to an EOT. However, subject to meeting certain qualifying conditions, the effective rate of CGT in an EOT transaction is 12%, due to a 50% CGT exemption available to selling shareholders. The structure also allows for Income Tax-free employee bonuses of up to £3,600 per year, and qualifying Corporation Tax deductions for the company.

What next?

Tax efficiency matters, but it isn’t the whole story. While mitigating tax is compelling, choosing the right exit route for you and your business depends on:

• Your financial goals;
• Your desired timeline for exiting the business;
• The future role of your team; and
• The legacy you want to leave.

It’s important to look at the whole picture.

Ready to explore your options?

Every succession journey is different, and the right path for you depends on your goals, your team and the legacy you want to leave. If you’re interested in exploring your succession solutions, get in touch today.