If we sell the business exactly how much Tax do owners pay?

FrankFalcon

Hi all

Asking this for a close family member.  Before I start, I fully understand that given the financial amounts included in this thread it would be essential to get proper advice at the time.  However, we just want to know now if its worth selling the business, closing the business etc because we have heard loads of different stories.  I have changed one or two details so as not to identify the company/individuals involved.  I've also written this thread as if it's me that I am asking for as not to confuse posters to this thread.  

So, I own a manufacturing company with my 2 pals.  I own 40% of the shares.  My best pal owns 40% of the shares and a bloke who used to work with us owns the other 20% of the shares.  It is fair to say that the 20% shareholder is hostile (if that has any bearing on this matter).

Last month, the building next door to us was sold for £700,000.  The property developer recently called in to us and told us that he would be willing to pay us £800,000 for our factory/Land THAT WE OWN OUTRIGHT.  Given that none of us are getting any younger I actually drove home and considered the offer, but I am baffled by how much tax we would have to personally pay if we sold the land and walked away.  I have heard of Entrepreneur tax and differed dividends etc.

So, in a nutshell, Joe Bloggs comes along and says to us "You close your factory and sell me the land for £800,000 and you carry on your business somewhere else in a rented unit"

Of course it doesn't take a genius to work out that if we sold the factory/land for £800,000 the split would be

Shareholder 1 40% = £320,000
Shareholder 2 40% = £320,000
Shareholder 3 20% = £160,000

Here's the BIG questions...What tax would we pay on this? We are certain the Government will want their bit, but in which format? Income Tax? Capital Gains Tax? etc etc.  How much actual cash would we each walk away with?

Thanks all.  I reiterate, that if we were going to sell, we would seek professional advice first, but we just wanted to know ourselves in layman's terms.

Thanks in advance.

Isthisforreal99

So you are just selling the business premises and not the business itself?

You say 'company' so I'm assuming Ltd? If Ltd is it the company that owns the premises/land? If so, the Corporation Tax may be payable.

Albermarle

It is not clear whether you intend to carry on with the business, in another place.
If yes, then there would be some significant costs to move a manufacturing operation.

If you kept the business and sold the land, I do not think you would just split the £800K 40:40:20.

Instead you would have a business with a lot of cash in the bank ( even after moving costs) , which the owners would have to decide what to do with it.

poseidon1

FrankFalcon said:

Hi all

Asking this for a close family member.  Before I start, I fully understand that given the financial amounts included in this thread it would be essential to get proper advice at the time.  However, we just want to know now if its worth selling the business, closing the business etc because we have heard loads of different stories.  I have changed one or two details so as not to identify the company/individuals involved.  I've also written this thread as if it's me that I am asking for as not to confuse posters to this thread.  

So, I own a manufacturing company with my 2 pals.  I own 40% of the shares.  My best pal owns 40% of the shares and a bloke who used to work with us owns the other 20% of the shares.  It is fair to say that the 20% shareholder is hostile (if that has any bearing on this matter).

Last month, the building next door to us was sold for £700,000.  The property developer recently called in to us and told us that he would be willing to pay us £800,000 for our factory/Land THAT WE OWN OUTRIGHT.  Given that none of us are getting any younger I actually drove home and considered the offer, but I am baffled by how much tax we would have to personally pay if we sold the land and walked away.  I have heard of Entrepreneur tax and differed dividends etc.

So, in a nutshell, Joe Bloggs comes along and says to us "You close your factory and sell me the land for £800,000 and you carry on your business somewhere else in a rented unit"

Of course it doesn't take a genius to work out that if we sold the factory/land for £800,000 the split would be

Shareholder 1 40% = £320,000
Shareholder 2 40% = £320,000
Shareholder 3 20% = £160,000

Here's the BIG questions...What tax would we pay on this? We are certain the Government will want their bit, but in which format? Income Tax? Capital Gains Tax? etc etc.  How much actual cash would we each walk away with?

Thanks all.  I reiterate, that if we were going to sell, we would seek professional advice first, but we just wanted to know ourselves in layman's terms.

Thanks in advance.

More information required.

Personal or Corporate ownership? 

How long owned if corporate?

Worth noting if corporate, companies get indexation inflation relief to December 2017 over the ownership period on company asset disposals. However if corporate owned, there will likely be double tax to access the sale proceeds for personal use, unless there are substantial positive shareholder/ director loan accounts balances outstanding.

If personally owned  ( and let to company ) see below guidance on business asset disposal relief -

https://www.gov.uk/government/publications/entrepreneurs-relief-hs275-self-assessment-helpsheet/hs275-business-asset-disposal-relief-2025#:~:text=complete Section B.-,Amount of relief,How the relief is calculated'.

You will note company ownership does not qualify for BADR as such.

FrankFalcon

Hi all. 

Thank you for your input up to now. 

The company is a Limited company, trading for over 40 years. It is VAT registered (if that matters?) and trades well. The company has independent, commercial accountants (but they can’t/won’t offer any ‘advice’ on the question I am asking herein). 

One of the reasons for the potential sale is because the company has downsized over the years because new technology has deemed a lot of the old mechanical machinery obsolete/not profitable to run. For example, a modern CNC machine these days takes up a 5th of the space that several, dated manufacturing machines. 

Another reason for the potential sale is that the directors/shareholders are wanting to scale down before possibly retiring. 

At this point I thought I would add the following, just in case it makes any difference. 

There were bank loans on the factory for 30 years, but they were satisfied last year, so that the building is now owned by the company. 

All 3 shareholders were once directors but the 20% shareholder retired 2 years ago and was ‘removed’ as a director. Therefore, the 2 shareholders owning 40% are still Directors and both work on site every day. 

If it matters, payroll works like this:

Both 40% Shareholders take the minimum £999 monthly ‘salary’ through the PAYE system. They also take a dividend which is literally paid from the company into their bank accounts. The independent company accountants deal with the accounting of this. 

The 20% Shareholder, who was once a worker/Director, now only receives the (pro Tata) dividend on the same day as the other 2. 

With regard to the actual business ongoing, this has not been decided. In a perfect world, the business itself would carry on ‘elsewhere’ in a smaller, RENTED unit. 

I hope I have given you guys enough information to point us to seek advice from the correct professionals, with some knowledge in mind. 

Dead_keen

There are a number of potential routes.  Some are easier than others.  They have different tax implications for you and different tax and commercial implications for the purchaser. Here are the first four ideas that strike me but there are lots more:

1. Sell all the shares in the company to the third-party for £800,000 + £x.  CGT on disposal, probaby BADR at 10% for shareholders 1 and 2 (but not 3 - 24%).   Shareholders 1 and 2 (and possible 3) set up a new company to buy the parts of the original company that the third party purchaser does not want for £y.  In an ideal world, £x and £y will be the same but may not be.  Important to value the assets being bought at market value (including any intangibles) to prevent a benefit in kind and being mean to shareholder 3 if they are not to be a shareholder in the new company.  Third party will need to think about all sorts of things, including whether they want the property in a second-hand company and what potential liabilities the company has (so indemnities and warranties will be required), stamp duty, whether TOGC VAT applies, how to TUPE employees and the company's tax liabilities on disposing of its assets (including the property if they need to extract it). But BADR will give you the lowest tax rate.

2. Distribute the property to shareholders (corporation tax on gain company makes, based on market value of property, distribution taxed as dividend, so up to 39.35%), shareholders sell property to third party for market value.  I'll stop adding all the complications as it is boring and your professional adviser will tell you all about them, but this is probably much better for a purchaser that the first as they just get the asset that they want.  But corporation tax and then nearly 40% on what is left is not as good as 10% tax.

3. Company sells the property to third party (corporation tax for the company), cash distributed as a dividend, can do it over several years if you want to manage your marginal tax rates on dividends.  Purchaser will like this as it is straightforward.  But 20%+ CT rate on company, means less to pay out as dividend that will then be taxed at up to 39.35%.  So you may be less keen on this.

4. Company sells property to a third party, company sells the rest of its assets to a new company set up by shareholders 1 and 2 (and possibly 3) (again corporation tax for company), then liquidate company and shareholders 1 and 2 get BADR (but not shareholder 3).    

Good luck finding your professional advisers (at least a tax professional who can manage all the taxes and helpfing you to make the right choice and lawyer for SPA, warranties and indemnities, TUPE transfers, fighting shareholder 3 who will refuse to sign anything, etc).

FrankFalcon

Dead_keen said:

There are a number of potential routes.  Some are easier than others.  They have different tax implications for you and different tax and commercial implications for the purchaser. Here are the first four ideas that strike me but there are lots more:

1. Sell all the shares in the company to the third-party for £800,000 + £x.  CGT on disposal, probaby BADR at 10% for shareholders 1 and 2 (but not 3 - 24%).   Shareholders 1 and 2 (and possible 3) set up a new company to buy the parts of the original company that the third party purchaser does not want for £y.  In an ideal world, £x and £y will be the same but may not be.  Important to value the assets being bought at market value (including any intangibles) to prevent a benefit in kind and being mean to shareholder 3 if they are not to be a shareholder in the new company.  Third party will need to think about all sorts of things, including whether they want the property in a second-hand company and what potential liabilities the company has (so indemnities and warranties will be required), stamp duty, whether TOGC VAT applies, how to TUPE employees and the company's tax liabilities on disposing of its assets (including the property if they need to extract it). But BADR will give you the lowest tax rate.

2. Distribute the property to shareholders (corporation tax on gain company makes, based on market value of property, distribution taxed as dividend, so up to 39.35%), shareholders sell property to third party for market value.  I'll stop adding all the complications as it is boring and your professional adviser will tell you all about them, but this is probably much better for a purchaser that the first as they just get the asset that they want.  But corporation tax and then nearly 40% on what is left is not as good as 10% tax.

3. Company sells the property to third party (corporation tax for the company), cash distributed as a dividend, can do it over several years if you want to manage your marginal tax rates on dividends.  Purchaser will like this as it is straightforward.  But 20%+ CT rate on company, means less to pay out as dividend that will then be taxed at up to 39.35%.  So you may be less keen on this.

4. Company sells property to a third party, company sells the rest of its assets to a new company set up by shareholders 1 and 2 (and possibly 3) (again corporation tax for company), then liquidate company and shareholders 1 and 2 get BADR (but not shareholder 3).    

Good luck finding your professional advisers (at least a tax professional who can manage all the taxes and helpfing you to make the right choice and lawyer for SPA, warranties and indemnities, TUPE transfers, fighting shareholder 3 who will refuse to sign anything, etc).

Wow! Thank you so much for taking the time to provide us with an excellent set of choices. Naturally, a specialist in this field is required, which we will seek. 

poseidon1

Problem here is corporate ownership will give rise to a property gain liable to corporation tax on the sale subject to indexation inflation relief to 2017 as advised. However indexation might not make much impact on a low base cost of the property on the balance sheet. Tax rate could be as high as 25%.

Next problem how to extract the taxed profits. Shareholder dividends not particular tax efficient unless spread across many years, and even then there is the forthcoming 2% surcharge to contend with.

What would help to attract a 10% CGT exit rate for proceeds paid to all shareholders is a full on company liquidation to benefit from personal BADR on closure of the company. Consideration then given to a new company start up from scratch for the directors who still wish to continue.

However, since the company accountants have bowed out of offering any tax advice, the directors will need to seek the services of a pro active firm of tax accountants with the necessary expertise to run through the pros and cons of a company liquidation and potential Newco start up. This suggests approaching either a Chartered Accountancy firm with in-house tax and corporate restructuring competency or a specialist tax/ corporate consultancy.

All in all their potential windfall from a sale, may not not look quite so attractive when tax , exit and new start up costs  are considered. 

A pity the current accountant had not thought to explore in the past the possibility of the business establishing a SSAS  to hold the property as a pension scheme asset. All sorts of tax avoidance possibilities would have arisen, not least being complete avoidance of capital gains / corporation tax now in point.

Have noted Dead_keen' s idea of a sale of the company direct to property developers. Putting aside the issue of such sale including assets in the company not wanted by the developers, it would leave them with the property on the balance sheet with a substantial unrealised taxable gain they would ultimately be responsible for. Unlikely to be an appealing prospect for the developers, who would want to discount the company sale to account for the embedded tax exposure. As advised a clean voluntary liquidation by the shareholders after property sale maybe more appropriate. Another option to consider at least.

FrankFalcon

poseidon1 said:

Problem here is corporate ownership will give rise to a property gain liable to corporation tax on the sale subject to indexation inflation relief to 2017 as advised. However indexation might not make much impact on a low base cost of the property on the balance sheet. Tax rate could be as high as 25%.

Next problem how to extract the taxed profits. Shareholder dividends not particular tax efficient unless spread across many years, and even then there is the forthcoming 2% surcharge to contend with.

What would help to attract a 10% CGT exit rate for proceeds paid to all shareholders is a full on company liquidation to benefit from personal BADR on closure of the company. Consideration then given to a new company start up from scratch for the directors who still wish to continue.

However, since the company accountants have bowed out of offering any tax advice, the directors will need to seek the services of a pro active firm of tax accountants with the necessary expertise to run through the pros and cons of a company liquidation and potential Newco start up. This suggests approaching either a Chartered Accountancy firm with in-house tax and corporate restructuring competency or a specialist tax/ corporate consultancy.

All in all their potential windfall from a sale, may not not look quite so attractive when tax , exit and new start up costs  are considered. 

A pity the current accountant had not thought to explore in the past the possibility of the business establishing a SSAS  to hold the property as a pension scheme asset. All sorts of tax avoidance possibilities would have arisen, not least being complete avoidance of capital gains / corporation tax now in point.

Have noted Dead_keen' s idea of a sale of the company direct to property developers. Putting aside the issue of such sale including assets in the company not wanted by the developers, it would leave them with the property on the balance sheet with a substantial unrealised taxable gain they would ultimately be responsible for. Unlikely to be an appealing prospect for the developers, who would want to discount the company sale to account for the embedded tax exposure. As advised a clean voluntary liquidation by the shareholders after property sale maybe more appropriate. Another option to consider at least.

Again… thank you so much for taking your time to write such a detailed response. I Have to say, after reading the detailed responses, ‘disappointed’ is the word that springs to mind. Disappointed that so much money goes in the coffers of the government. 

If I may veer off subject a little, this company once had a great customer who had a healthy order book and decent bank balance. The customer paid us up and told us he was “Going under”. We enquired why would he want “go under” and he told us exactly this “I have an unscrupulous employee who has deliberately injured himself at work and really egged the injury on”. Before, I continue, I know nobody would deliberately injure themselves badly, but for the purpose of this that is what the customer told us. So, we asked the customer how/why would he/what would he gain from “going under” and he told us “It is illegal to operate a business if you KNOW of any reason that the business may become insolvent”. Our customer friend pointed to the ‘injury case’ and the worst possible scenario… which could be tens of thousands of pounds compensation, which could bust him ‘in a worse case scenario’. So, he TECHNICALLY ‘went under’. So, I guess what I am alluding to here, and I know it’s a totally different question that the original title… what would happen if the company was to ‘go under’. Who would get the assets (the £800,000 building etc) then? Surely the shareholders… after paying all creditors, if there were actually any. 

FrankFalcon

I believe what I just alluded to is called ‘Solvent Liquidation’. 

Dead_keen

FrankFalcon said:

I believe what I just alluded to is called ‘Solvent Liquidation’. 

Yes, it is a "members' voluntarily liquidation".  It's basically my idea "4" above but in a different order.  I had (i) directors sell all assets, (ii) shareholders start MVL of company at a time when cash is its only asset, (iii) liquidator pays cash to shareholders, and (iv) at the end of the MVL the company ceases to exist. 

Your idea is: (i) start MVL when company has both the property and business, (ii) liquidator (not directors) sells the company's assets for cash, (iii) liquidator pays cash to shareholders, and (iv) at the end of the MVL the company ceases to exist. 

To me, getting the liquidator involved in selling assets will be more expensive and less flexible than if the directors did it.  It could also take more time for you to get the cash compared to just an MVL of the company holding cash.  But the tax rate you pay will be the same (* unless the liquidation process goes on more than three years after the trade stops).