Tax increases on the sale of your Limited Company

Running a business via the legal structure of a Limited Company can be beneficial to a business owner on more than one level, however if you wish to sell a Limited Company it could become much more costly.

A business owner should be only interested in the net sale proceeds from the sale of their business. That is after the costs of the sale, agents fees, solicitors fees, and of course tax.
When you sell a business trading under the structure of a Limited Company there are two basic methods of structuring a sale of your company. Firstly as a share sale, or secondly as an asset deal.

In the first of these methods you just sell the shares, whereas in an asset deal the company sells the assets of the Limited Company to the purchaser.

In most cases a share sale would be preferred if you’re the seller as it will usually lead to the lowest tax charge. However, many purchasers prefer to acquire the assets of the company so you may therefore have to go down the asset route.

After April 2010 if you sell the assets of the company rather than the shares of the company, the tax changes could prove very costly.

The reason is that as from 6 April 2010 anyone earning over £150,000 per tax year will pay income tax at an effective tax rate of 36.1% on dividend receipts.

In addition the rate of corporation tax for small companies is supposed to increase to 22%.

When you take these two changes into account the tax charge for anyone looking to extract profits from a company via dividends could significantly increase.

So what can you do? Either:

· Sell your business before 6 April, however this even now is very a very short period of time.
· Offer your business for sale selling the share of your company not the assets
· When the business is sold, take out less than £150,000 a year from this company; this would only work if you didn’t need the full sale proceeds immediately.
· Become of non-resident and extract free of income tax, however you would of course need to live abroad.

By far the easiest of these is the sell the shares of the business not the assets

This entry was posted on 09/12/2009 at 12:24 pm and is filed under Selling Your Business, General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.