Nov 252013

The following is an overview of some of the main tax issues that arise when a business is sold. We shall assume in this case that we have a corporate buyer and a corporate seller. We shall also assume both parties to the transaction are subject to UK corporation tax and that the business is a trading operation.

There are two ways of structuring a business sale:

  • A share sale; or
  • An asset sale.

So, if Tradeco is the company actually carrying out the business, a share sale will involve V selling Tradeco (we shall assume that the latter is a 100% subsidiary, though this needn’t be the case).

Share sale

If, on the other hand, we are interested in an asset sale, the seller is Tradeco itself, rather than V.

Asset sale

Tradeco may or may not intend to remit the sale proceeds back to V, depending on what is left behind in the company. If Tradeco is running another business or is about to start a new operation, it may well need the cash to fund these activities. Alternatively, it may pay a dividend to its parent, or even be liquidated following the business sale.

We shall not concern ourselves with these matters in this article, but will concentrate on the tax issues arising from the sale transaction itself. We shall first look at share sales, before turning to asset sales – which route is the better from a tax perspective?

Share sale – capital gains for the Seller

The Seller will usually prefer a share sale in order to claim the substantial shareholding exemption. This requires the following conditions to be satisfied1:

  • V must be a trading company or a member of a trading group2;
  • Tradeco itself must be a trading company or the holding company of a trading (sub)group3;
  • V must hold at least a 10% stake in Tradeco, either on its own, or with other members of its group4.

All three conditions must be satisfied throughout a continuous 12 month holding period falling within the two years prior to the sale5. The first two conditions – the “trading requirements” – must also be satisfied immediately after the sale6 .

If these conditions are satisfied, the shares can be sold tax free.

That’s all very well, but what if the shares are standing at a loss? Unfortunately, if the substantial shareholding conditions apply, any capital loss sustained on the shares cannot be used to relieve other taxable gains in V’s group. This is due to the general tax rule that where gains are exempt, losses are unallowable7.

In these circumstances, would an asset sale be preferable for V? We shall look at this later on in the article.

Share sale – Seller’s exit charges

There are three types of exit charge that can arise on the sale of a company:

  • Capital gains degrouping charges in respect of capital assets acquired by Tradeco from fellow group members in the six year period prior to the sale8;
  • “IP degrouping” charges in respect of “IP” assets acquired by Tradeco from fellow group members in the six year period prior to the sale9;

These two are broadly similar – we have come across them in previous articles.

  • SDLT exit charges in respect of property assets acquired by Tradeco within the previous three years, either as part of an intra-group transaction or a corporate restructuring10.

These exit charges only apply to those assets that Tradeco still owns on leaving V’s group. An exit charge effectively constitutes a clawback of the tax relief that was granted when the relevant assert was acquired.

The IP and SDLT exit charges fall primarily on Tradeco, the company leaving the V-group. Consequently, P will require that V bears this cost, and accordingly the sale documentation needs to provide the appropriate warranties and indemnities.

Until recently, the same considerations applied to the capital gains degrouping charges. However, since 2011 any degrouping charge is simply added on to the purchase price when calculating V’s tax liability (as discussed in a previous article). If the substantial shareholding conditions hold, the effect if to extinguish the liability altogether. In any event, P doesn’t require the same degree of protection as with the IP and SDLT exit charges, as Tradeco doesn’t bear the primary liability.

Stamp duty is payable on a share sale

Stamp duty is payable on the sale of the shares at 0.5% of the purchase price11. The stock transfer form needs to be presented for stamping, together with the duty, within 30 days12. Note that time runs not from the date when the business sale agreement is made, but from the date when the transfer form is executed.


The Seller does not have to account for VAT, as a share sale is an exempt transaction13.

Can the Buyer get a tax deduction on a share sale?

No. Since the acquisition of shares is a capital cost, P cannot write off the purchase price (or any part of it) against its revenue profits. This follows the general rule that capital expenditure is not usually allowable against income receipts14.

As we shall see shortly, P is more likely to get a tax deduction on an asset sale. This is just one advantage for P – another reason is that asset sales are cleaner for the Buyer. When buying a company, one is buying not only the underlying business, but all the liabilities that go with it, including those that the Seller might not be willing to let on!

How does P know that Tradeco isn’t about to be landed with a huge cleanup bill for environmental damage, which the insurers are haggling about? What if the company has been visited several times by the VATman? Does P really want to take this on? Of course, P can always protect itself via the warranties and indemnities in the sale agreement, but wouldn’t it be simpler to just buy the assets?

So what are the tax issues arising on an asset sale?

Asset sale – what type of tax deduction is available to P?

There are two types of deduction available:

  • Deductions for IP and goodwill – the part of the purchase price relating to these items are written off in line with the accounting treatment, or at a fixed rate15;
  • · Capital allowances in respect of certain capital items such as plant and machinery – this is one exception to the general rule that capital costs aren’t deductible against income profits. To the extent that P has not used its annual investment allowance, all costs can be relieved in a single accounting period16. However, any excess will have to be written down in instalments, on a reducing balance. Writing down rates depend on what exactly is being written down – the main rate is currently 18% per annum on a reducing balance,17 but items constituting long life assets and integral fixtures have a much lower rate of 8%18.

Here is a tax planning tip. Instead of acquiring the assets directly, P can incorporate a Newco to be the Buyer. Through Newco, P obtains the benefit of the tax deductions:

Tax planning business sale 1

If it is decided to sell the business after a year, P can sell Newco tax free under the substantial shareholding exemption:

Tax planning business sale 2

Asset sale – what about the seller’s capital gains exemption?

This time, there is no exemption for the Seller, who in this case, happens to be Tradeco. However, this may not be an issue if the asset sale actually results in an overall tax loss. If this is the case, the next question to ask is whether this loss can be utilised against profits or gains from any other Tradeco activities (if there are any), or elsewhere in the group. Even if this is not possible, at least Tradeco will not actually be faced with a tax bill.

Certain types of tax charge can be deferred by reinvesting all, or part of the sale proceeds into other trading assets. There are two types of rollover to consider:

  • Capital rollovers – where that part of the sale proceeds relating to capital items is reinvested into other capital items. Relief is only available for specific assets, such as land and buildings and fixed plant and machinery19;
  •  IP rollovers – which is similar to capital rollovers, except this time the relief is available for all types of intangibles under the new rules20.

For both types of relief, the relevant part of the sale proceeds must be applied in the following three years, or the acquisition of new assets can be backdated to any purchases made in the preceding twelve months21. Of course, Tradeco may not have a trade left following the business sale – it certainly won’t have the same trade. However, if Tradeco is in a group, relief is still available where the sale proceeds are reinvested in trading assets belonging to other group members22.

Exit charges on an asset sale

There are no clawback issues for Tradeco on an asset sale, as no company is leaving the group.

What stamp taxes are payable on an asset sale?

P will be responsible for paying the SDLT on any property assets such as the business premises23. All other business assets such as IP, goodwill, debtors and stock inventories are exempt from any stamp taxes.

Note that the rate of duty can be as high as 4%, as opposed to the 0.5% rate applicable on a share sale24. This doesn’t necessarily mean that an asset sale is more expensive in stamp duty terms. For example, suppose Tradeco has a value of £500m, and out of this amount, £50m is attributable to the business premises, with the balance consisting of IP and other non-stampable items. Then:

  • SDLT on the assets is 4% of £50m which is £2m;
  •  Stamp duty on the shares is 0.5% of £500m which is £2.5m. 

So more tax is payable on the share sale. Note that if we were to look through the corporate veil, we would find that the majority of the company’s assets aren’t even stampable.


Since this is a business sale, no VAT should be payable under the Transfer of a Going Concern (“TOGC”) rules25 – provided that both parties ensure that they fulfil the conditions! There are a few quirks in the rules that are worth noting. For example:

  • What is the VAT status of any property assets being transferred, such as the business premises? Normally, commercial property is exempt from VAT, but if Tradeco has exercised the option to tax, P must also exercise the option before the transfer is completed26;
  • P must carry on running the same kind of business after the sale is completed. For example, this relief is not available where P has decided to break up the business to unlock the value of the underlying assets27.

Tradeco needs to ensure that it is adequately protected by a suitably worded VAT clause in case the relief fails. Otherwise Tradeco will have to account for VAT out of the sale proceeds.

Rounding up – share sale or asset sale?

There is a tension in tax terms between both parties:

  • In general a Seller will want a share sale in order to claim a tax exemption. The Buyer cannot however claim a tax deduction for goodwill and IP under this route;
  • A Buyer can obtain tax relief under an asset sale, but this will be at the expense of the Seller’s tax exemption.

However, it should be noted that this is the general position, and assumes that the Seller is selling a thriving business for which the Buyer is prepared to pay a premium.

We have noted that the Seller may in fact, be nursing a loss, or there may be other reliefs available on an asset sale. Furthermore, if the tax deductions aren’t that substantial, the Buyer may be quite happy with a share sale. Consider the case where the business consists of a property development venture– would the SDLT on an asset sale outweigh the benefit of any tax reliefs for goodwill and IP?

Whichever route is taken, one should also bear in mind that the parties can adjust the purchase price to compensate for the loss of a tax benefit. One should also bear in mind that the appropriate tax treatment of any deal will depend on the particular circumstances of each case, taking into account the relevant commercial considerations.

  1. TCGA 1992 Schedule 7AC, paragraph 1.
  2.  TCGA 1992 Schedule 7AC, paragraph 18.
  3.  TCGA 1992 Schedule 7AC, paragraph 19.
  4.  TCGA 1992 Schedule 7AC, paragraphs 8, 9.
  5.  TCGA 1992 Schedule 7AC, paragraph 7.
  6.  TCGA 1992 Schedule 7AC, paragraphs 18(1)(b), 19(1)(b).
  7. TCGA 1992 s 16(2).
  8. TCGA 1992 s 179.
  9. CTA 2009 s 780. – By IP we mean intangibles and goodwill subject to the intangibles regime. These rules require these assets to be treated as revenue items.
  10. FA 2003 Schedule 7, paragraphs 3, 4A, 9.
  11. FA 1999 Schedule 13, paragraphs 1-3.
  12. Stamp Act 1891 ss 15A, 15B.
  13. VATA 1994 Schedule 9, Group 5, Item 6(a).
  14. CTA 2009 s 53.
  15. CTA 2009 ss 728-730.
  16. CAA 2001 s 51A.
  17. CAA 2001 s 56.
  18. CAA 2001 ss 33A, 102, 104A, 104D.
  19. TCGA 1992 ss 152(1), 155 contains the full list.
  20. CTA 2009 s 754.
  21. TCGA 1992 s 152(3), CTA 2009 s 756(1).
  22. TCGA 1992 s 175, CTA 2009 s 777. In fact, if it weren’t for these provisions, capital gains rollover relief for Tradeco would effectively be limited to whatever Tradeco had acquired within the previous year. The words of TCGA 1992 s 152(1) make clear that the sale proceeds have to be applied to the same trade – which Tradeco no longer has, after selling the business to P. There is no such restriction for IP rollovers.
  23. FA 2003 ss 43(1), 48, 49(1)
  24. FA 2003 s 55(2) – it depends on the amount of the consideration – 4% is the top rate for commercial property where the price is more than £500,000.
  25. VAT (Special Provisions) Order 1995/1268 Art 5.
  26.  1995/1268 Art 5(2), 5(2A).
  27.  1995/1268 Art 5(1)(a)(i), 5(1)(b)(ii).
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Satwaki Chanda

Satwaki Chanda

Satwaki Chanda is a tax lawyer with a First Class degree in Mathematics. Called to the Bar in 1992, he is the Editor of Tax Notes.
Satwaki Chanda

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  2 Responses to “Tax Issues on selling a Business”

  1. You quite correctly state that for SSE V must be a trading company or member of a trading group before and after the sale. In your example Tradeco carries on the business, If V is just a holding company and there are no other subisdiaries, SSE will not apply because immediately after the sale V is neither trading nor a holding company and V shareholders may then no longer qualify for Entrepreneur’s Relief when liquidating V. In those circumstance, V shareholders may want to sell V with Tradeco and claim Entrepreneur’s Relief (assuming they qualify).

    • If V is a holding company down to its last subsidiary, then it makes more sense for the ultimate shareholders to sell V – in which case, this transaction would not be within the scope of this particular article.

      However, sometimes it is not possible to sell V. For example, the shareholders may disagree as to whether to accept an offer for the sale of the business. One majority shareholder may have insufficient control to force a sale of V, but may have control that he can force a sale of the subsidiary Tradeco (I actually encountered this in practice – in my case, there were two subsidiaries not one).

      It is still possible in these circumstances for V to claim the exemption, provided that V is liquidated reasonably quickly after the sale and the proceeds distributed. This is the liquidation exception in TCGA 1992 Schedule 7AC paragraph 3 – in particular see paragraph 3(3). This provision is in fact an anti-avoidance provision to stop corporate shareholders with a controlling interest from claiming an allowable loss by causing the subsidiary to stop trading (see paragraph 3(2)(e)).

      This would not impact entrepreneurs relief for those entitled to it. Although V no longer satisfies the trading requirements, there is a three year period following the Tradeco sale during which a disposal of the V shares will still qualify for the relief (TCGA 1992 ss 169I(2)(c), 169I(5), 169I(7).).

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