Posted 4th September 2012

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Introduction

This information sheet is an overview of the main issues which the seller of a business carried on by their company may need to consider in deciding whether the transaction should be structured as a share sale or an asset sale.  Each method has its own advantages and disadvantages.

When a business is carried on by a company as opposed to a partnership or a sole trader there are two ways in which a buyer can acquire the business.  

  • a share purchase where the buyer buys the shares of the company which itself owns all the assets, liabilities and obligations of the business;
  • an asset purchase where the buyer buys the assets of the business from the company that owns them.

In a share purchase the buyer is purchasing the entire entity which will include all assets, liabilities and obligations, whether the seller is 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 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. Conversely, an asset purchase will often be preferred by the buyer.  The different tax treatments and risks involved for the two types of sale can affect the price.

This information sheet assumes that the seller is an individual who is UK tax resident.

 

Advantages of a Share Sale

  • Entrepreneurs´ relief    –    If the shares are sold for more that 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%.  To qualify, throughout the period of one year before the disposal, the seller must have been a director or employee of the company (or a company in the same group) and must have held at least 5% of its ordinary share capital, allowing him to exercise at least 5% of the voting rights.  The relief applies to the first £10 million of qualifying capital gains (after deduction of any related losses).
  • No double tax charge   –      There is a potential double tax charge on an asset sale 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 that is made from the sale of assets.
  • 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.  This is not possible on an asset sale, although similar relief is available on an asset sale if the proceeds are reinvested by the seller in certain qualifying replacement assets.  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.
  • No capital allowances balancing charges      –       A single chargeable gain will arise on a share sale.  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 as the excess is treated as taxable trading income to the extent that it is less than original cost and as capital gain to the extent that it exceeds 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.
  • Continuity    –      A share sale does not affect the continuity of the business which carries on without interruption.  With an asset sale it may not be possible to transfer some assets or agreements without the consent of a third party.

 

Advantages of an Asset 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 and 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     –     The Seller can choose which assets to sell and which to keep.  If there is a share sale if it is desired 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.
  • 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 by an asset sale.  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.  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 allowances 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 sale price of the asset and its tax written down value.  That loss can be set against other income or chargeable gains so as to reduce the seller´s taxable profits.

 

For more information contact Malcolm Jones on 01423 789 059 or malcolm@newtons.co.uk

 

This Information Sheet is for general information only and 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.

Introduction

This information sheet is an overview of the main issues which the seller of a business carried on by their company may need to consider in deciding whether the transaction should be structured as a share sale or an asset sale.  Each method has its own advantages and disadvantages.

When a business is carried on by a company as opposed to a partnership or a sole trader there are two ways in which a buyer can acquire the business.  

  • a share purchase where the buyer buys the shares of the company which itself owns all the assets, liabilities and obligations of the business;
  • an asset purchase where the buyer buys the assets of the business from the company that owns them.

In a share purchase the buyer is purchasing the entire entity which will include all assets, liabilities and obligations, whether the seller is 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 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. Conversely, an asset purchase will often be preferred by the buyer.  The different tax treatments and risks involved for the two types of sale can affect the price.

This information sheet assumes that the seller is an individual who is UK tax resident.

 

Advantages of a Share Sale

  • Entrepreneurs´ relief    –    If the shares are sold for more that 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%.  To qualify, throughout the period of one year before the disposal, the seller must have been a director or employee of the company (or a company in the same group) and must have held at least 5% of its ordinary share capital, allowing him to exercise at least 5% of the voting rights.  The relief applies to the first £10 million of qualifying capital gains (after deduction of any related losses).
  • No double tax charge   –      There is a potential double tax charge on an asset sale 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 that is made from the sale of assets.
  • 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.  This is not possible on an asset sale, although similar relief is available on an asset sale if the proceeds are reinvested by the seller in certain qualifying replacement assets.  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.
  • No capital allowances balancing charges      –       A single chargeable gain will arise on a share sale.  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 as the excess is treated as taxable trading income to the extent that it is less than original cost and as capital gain to the extent that it exceeds 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.
  • Continuity    –      A share sale does not affect the continuity of the business which carries on without interruption.  With an asset sale it may not be possible to transfer some assets or agreements without the consent of a third party.

 

Advantages of an Asset 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 and 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     –     The Seller can choose which assets to sell and which to keep.  If there is a share sale if it is desired 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.
  • 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 by an asset sale.  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.  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 allowances 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 sale price of the asset and its tax written down value.  That loss can be set against other income or chargeable gains so as to reduce the seller´s taxable profits.

 

For more information contact Malcolm Jones on 01423 789 059 or malcolm@newtons.co.uk

 

This Information Sheet is for general information only and 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.