When a company carries on a business instead of a partnership or a sole trader, there are two ways a buyer can acquire the business – a share sale or an asset sale. The seller of a business carried on by their company may need to consider whether the transaction should be structured as a share sale or an asset sale. This information sheet will discuss share sales vs asset sales, exploring the advantages and disadvantages of each.
This information sheet assumes that the seller is an individual who is a UK tax resident.
What is the Difference Between a Share Sale and an Asset Sale?
Although they may sound similar, conducting a share sale is different to conducting an asset sale. The main difference between a share sale and an asset sale is that in a share sale, the buyer is purchasing the entire entity, which will include all assets, liabilities and obligations, whether the seller is aware of them or not. For an asset sale, the buyer purchases only the assets of the business from the company that owns them.
Once a share sale is complete, the buyer assumes responsibility for the whole company. For this reason, there would usually be greater due diligence and more extensive legal documentation for a share purchase than an asset purchase.
As a broad generalisation, the seller is likely to prefer a share sale, and the buyer will often prefer an asset purchase. The different tax treatments and risks involved in a share sale vs an asset sale can affect the price.
Advantages of a Share Sale
- Entrepreneurs’ relief
If the shares are sold for more than the seller paid for them, there is likely to be a chargeable gain. If the company is a trading company (or holding company of a trading group), the seller can benefit from a capital gains tax (CGT) rate of 10%.
- Roll-over relief
A share sale should enable the seller to defer tax on chargeable gains to the extent that the consideration takes the form of shares or loan notes in the buyer. In each case, the effect of the relief is to defer tax on any gain until the subsequent sale of the consideration shares, loan notes or replacement assets.
A share sale does not affect the continuity of the business, which carries on without interruption. However, with an asset sale, it may not be possible to transfer some assets or agreements without the consent of a third party.
Disadvantages of a Share Sale
- Negotiating power
In a share purchase, the buyer is purchasing the entire entity, which will include all assets, contracts and liabilities, whether they are aware of them or not. Once the transaction is complete, the buyer assumes responsibility for the whole company. For this reason, there would usually be greater due diligence in a share sale vs an asset sale and an additional professional fee for a share purchase than an asset purchase. The seller may be able to negotiate a better price for relieving the buyer of these matters.
- Retained assets
During a share sale, if the seller desires to keep certain assets, these may have to be transferred out of the company prior to the sale of the business. This may lead to additional costs and tax charges. In an asset sale, the seller can choose which assets to sell and which to keep.
Advantages of an Asset Sale
- Personal guarantees
If the seller has given a guarantee to the company’s bank or anyone else, it will not be affected by a share sale or an asset sale. However, if, for any reason, the guarantee is not released at the same time as the shares are sold, the seller could be liable for future obligations incurred by a company that is no longer under his control.
- Allowable losses
If the capital assets (other than those on which capital allowances have been claimed) are to be sold at a loss, this should result in an allowable loss that can be set against other chargeable gains of the seller. The sale of trading stock for less than cost will give rise to a trading loss.
- Balancing allowance
A sale of assets, which have fallen in value more rapidly than their tax depreciation, may give rise to a capital allowance that would not arise on a share sale. The seller is treated for tax purposes as making a trading loss equal to the difference between the asset’s sale price and its tax written down value. That loss can be set against other income or chargeable gains to reduce the seller’s taxable profits.
Disadvantages of an Asset Sale
- Double tax charge
There is a potential double tax charge on an asset sale that can result in the seller being taxed twice. Once on the gain made from the sale of the assets and again when the sale proceeds are distributed. The selling company may suffer corporation tax on chargeable gains that arise on the sale of the assets. The shareholders in the selling company may then pay income tax on dividends paid out of any profit made from the sale of assets.
- Capital allowances balancing charges
On an asset sale, the sale of each category of asset will have different tax consequences. For example, the disposal of certain assets in respect of which capital allowances have been claimed could trigger a balancing charge for the seller. This could be the case if the particular asset or, in the case of pooled assets, the asset pool, is sold for more than its tax written down value.
The excess is treated as taxable trading income to the extent that it is less than the original cost and capital gain to the extent that it exceeds the original cost.
Similarly, the disposal of goodwill or intellectual property rights for a price in excess of the value at which those assets are recorded in the company’s balance sheet could trigger a charge to tax on income under the tax regime for intangible assets acquired on or after 1 April 2002.
When it comes to share sales or asset sales, whether you are looking to buy or sell, it pays to be prepared. At Newtons Solicitors, we provide a range of commercial property legal assistance and advice services for businesses. For more information, please get in touch via our online contact form.
This Information Sheet is for general information only. It should not be relied on as it may not be up to date or address the specific circumstances of any individual, firm or organisation. No responsibility can be accepted Newtons Solicitors Limited for any loss suffered by anyone acting or refraining from action as a result of anything in this information sheet. We recommend you take independent legal advice in relation to your particular circumstances.