Contents
- Asset sale or share sale
- Business Asset Disposal Relief (BADR)
- How deferred and contingent consideration is taxed
- Timing, pensions and family shareholdings
- VAT, WIP and the finer points
- Do the tax analysis before heads of terms
- Where to start
- Questions
As an accountant you already know the basic Capital Gains Tax rules. The decisions that change your net proceeds are easy to leave too late and expensive to get wrong, and they need to be made before you agree terms. This is general information and is not tax advice. Rates and reliefs change, and the right answer depends on your circumstances — take your own written tax advice before you sign heads of terms.
Asset sale or share sale
If you trade through a limited company, this decision shapes the rest of the deal. The two routes transfer different things, carry different risk, and are taxed very differently — and buyers and sellers often prefer opposite ones.
| | Share sale | Trade & asset sale |
|---|
| What transfers | The company, whole | Goodwill, WIP, client relationships |
| Usually preferred by | Sellers | Buyers |
| Seller taxed on | Gain on the shares (CGT) | Company receives proceeds; extracting them is a second taxable step |
| Buyer inherits | History, contracts and liabilities | A clean slate |
| Typical friction | More buyer diligence on liabilities | "Double extraction" for the seller |
The double-extraction point on an asset sale — the company pays tax on the disposal, then you pay again to get the cash out as dividend or on winding up — is one reason to model the tax on both routes before committing. A sole practitioner sells the trade and assets by definition; the share-vs-asset question is a limited-company issue.
Business Asset Disposal Relief (BADR)
BADR can materially reduce the Capital Gains Tax rate on qualifying gains, up to a lifetime limit. Check the current rate and limit, because both have changed in recent years, and eligibility is not automatic. It depends on factors such as your qualifying period of ownership, your shareholding and voting rights, your officer or employee status, and the business being a trading business throughout. Structuring a deal — for example bringing in new shareholders, or the timing of a disposal — without first checking the BADR conditions against the current rules can lose the relief on part or all of the gain. Check your position early, in writing.
How deferred and contingent consideration is taxed
When part of the price is paid after completion, the tax treatment of the later payments needs care. The key distinction is whether the future amount is ascertainable (fixed, just paid later) or unascertainable (contingent — e.g. a retention-based earn-out):
- Ascertainable deferred consideration is generally brought into the CGT computation at the outset, even though it's received later.
- Unascertainable (contingent) consideration is treated, under the principle in Marren v Ingles, as a separate chargeable asset valued at completion — with a further gain or loss when the amount is received. Handled badly, this can leave you paying tax on money you never ultimately receive.
This is why the structure agreed in the heads of terms and the tax analysis have to be joined up — see earn-outs and deferred consideration for the commercial side.
Timing, pensions and family shareholdings
Several established planning points can change the outcome, and each needs to be in place before a deal is on the table:
- Straddling tax years. Structuring a disposal to fall across two tax years can use two annual exemptions and manage the rate.
- Pension contributions. Making contributions in the right year can be efficient alongside a disposal.
- Spouse/family shareholdings. How shares are held between spouses (and whether a spouse qualifies for reliefs in their own right) can materially affect the total tax. Transfers need to be genuine and made well ahead of a sale.
VAT, WIP and the finer points
Depending on structure, a sale may qualify as a transfer of a going concern (TOGC) for VAT, changing whether VAT is charged on the deal; confirm this with your adviser. The treatment of work-in-progress and debtors at completion, and any apportionment of consideration between goodwill and other assets, also affect the numbers and should be set out precisely in the agreement.
Do the tax analysis before heads of terms
The costliest mistake is leaving the tax analysis until the deal is agreed. By then the structure is largely fixed, the planning windows may have closed, and you're negotiating from a weaker position. Model asset-vs-share, confirm BADR, and settle the deferred-consideration treatment before heads of terms, so the commercial deal and the tax deal are designed together. Judge any offer on what you will receive after tax.
Where to start
Begin with a realistic valuation so you know the shape of the deal, then get your own adviser to model the structures and confirm reliefs before you agree terms.
