You’ve successfully grown and developed your business and may have reached the decision to either partially or fully exit. This could perhaps be because the next generation of your family are not interested in taking the business on and/or because you would like to realise value for the future and reap the rewards of your efforts over the years.
There are various options you may be thinking about – you could be thinking about:
- a share or asset sale
- an IPO
- a private equity deal
Either scenario will be a transformational event and will require a significant amount of planning to ensure you and your organisation are ready for this next important phase.
Having a tax efficient structure in place that works for existing shareholders, option holders, those who plan to exit, and future investors will be one of many important considerations.
These are some of the questions you should be thinking about ahead of a transaction:
When should I start to plan?
Planning for a liquidity event should begin 12 to 24 months ahead of a transaction. Getting advice early will be critical to any planning.
What is my potential tax exposure?
It’s important to know well ahead of any transaction what your tax exposure will look like now and how this could be impacted going forwards. This will include understanding the history of the shares’ base cost and whether there are any opportunities to structure the deal to maximise tax efficient reliefs. As part of this, you may also want to consider the extent you wish to de-risk now and bank some capital versus investment in the new structure.
Will I remain UK resident?
What are your medium to long-term plans and where do you plan to live? As a pre-requisite to any planning, it is important to fully understand the tax implications in the location you plan to be, especially if you could still be working for the company and/or making regular visits back to the UK.
Should I be thinking about asset protection?
Following a cash realisation event or a listing, it becomes very difficult to put meaningful amounts of UK assets into a family trust because the assets no longer qualify for Business Property Relief (BPR). Consideration should, therefore, be given to the merits of putting shares into trust whilst they qualify for BPR. There is no limit to the amount of BPR qualifying shares you can give away to a trust and with careful planning, there should be no immediate tax consequences.
Should I be thinking about a holding company?
In certain circumstances it may be possible to hold your shares via a new holding company, subject to HMRC clearance. This may ultimately deliver a tax-free exit through the use of the substantial shareholders exemption provided certain conditions are met.
How do I keep my team incentivised?
Ahead of a transaction it will be critical that your management team is happy and is bought into the next phase for the business. Have you considered share options or, if you already have a scheme in place, do you understand how it could be impacted by a liquidity event to ensure the team remains motivated?
Should I consider selling to an Employee Ownership Trust (EOT)?
A sale to an EOT can offer many advantages, including the incentivisation of employees through indirect ownership. It is also attractive because the sale is free of Capital Gains Tax (CGT) for the existing shareholders and offers the flexibility of a full or partial exit (although a controlling stake must be sold to access the CGT benefits).
As it does not require a third party purchaser, it is less disruptive to the business and the due diligence process is more straightforward. It can also offer a solution to succession issues. Typically, the purchase price is funded from future profits.
I am non-UK domiciled – are there any specific structures that could work for me?
Resident non-domiciled individuals (i.e. those who have been resident here for less than 15 out of the previous 20 tax years and haven’t decided to live in the UK permanently) have an opportunity to set up a Protected Trust prior to becoming deemed domiciled.
Holding private company shares in the trust via a non-UK holding company can offer an additional layer of protection against future UK inheritance tax exposure, in addition to or as an alternative to BPR.
Furthermore, sale proceeds can be invested by the trustees’ overseas and foreign income and gains generated within the trust are not usually taxable until a trust distribution is made or a benefit is received from the trust. This can also avoid the need for account segregation, which often leads to big headaches for taxpayers and their banks.
If you do want to give something back, it will be important to get the timing of making these donations right to ensure you get full tax deductibility for them.
To maximise value, motivate your team and manage expectations, the available options need to be explored well in advance. The key to optimising your exit is to start planning at the earliest opportunity.
For more information, contact us.