How can I beat the taxman when selling my business?
I had planned to exit my 10- year-old software company, which has revenues of £10m, in the next two to three years. Our VCs invested £2m four years ago for a 40% stake, but now I find they expect to exit within the next year to year and a half. What are the most tax-efficient options available to me and will I have to compromise my own plans to make the most attractive gains?
Christopher Jenkins of Wingrave Yeats writes:
On the assumption that you are a working director of the firm, it appears you qualify for the maximum Business Asset Taper Relief, so the Capital Gains Tax you will pay on exit will be 10% of the gain you make. If your family arrangements allow, why not avoid any CGT charge altogether and spend just over half the tax year, in which the gain was made, in a country that does not tax capital gains. Any payment of tax could also be delayed for a number of years by opting to accept a loan note rather than cash, or ‘rolling over’ your gain into a new business venture.
Your VCs clearly have a different timescale to you. Let’s assume it’s driven by their own internal business considerations rather than when your business will reach its moment of optimal value. Should you hang on in and attempt to refinance the business? Do you have a management team who would like to own a part of the business? Much depends on how the VCs are to exit and whether the terms of their investment require you to sell too.
Think about, and take advice on, your personal financial position, post the sale, before you make the decision to sell. What level of income will the proceeds provide for you? Just remember that a £4m lump sum after CGT, paying off a few debts and expenses of say £500,000, with income tax at 40%, taper relief at 10% and interest at around 3.5% only comes to £5,000 per month for the rest of your life.
Watch out for your Inheritance Tax position and revisit your Will. Talking of which, think about the quality of your life and about the others who fill it. Most business people never end up as rich as they set out to be, but that’s not always their priority.