A Management Buyout (MBO) can be a fantastic way of passing your business onto your management team. However, the tax considerations of an MBO must be factored into your decision.
We’ve outlined the key tax implications you must be aware of if your team approaches you with an offer:
Capital Gains Tax (CGT)
You will be required to pay CGT if you make a gain that surpasses the £3,000 threshold on the sale of your business or the shares relating to it.
The annual exemption threshold was formerly £6,000 and reduced to £3,000 as of April 2024.
Business Asset Disposal Relief
You may be able to reduce the amount of CGT due, if assets qualify for Business Asset Disposal Relief (formerly Entrepreneur’s Relief).
The relief can apply to the sale of all or part of a business or selling shares. Any qualifying gains will be taxed at the lower rate of 10 per cent.
Currently, you can claim up to £1 million in Business Asset Disposal Relief throughout your lifetime. This must be claimed within two years of the financial year in which the sale was made.
VAT
Many sale transactions will be considered to be a Transfer of a Going Concern (TOGC) and will therefore not be subject to VAT.
However, there are exceptions to this. Calculating whether VAT would be due on the sale is essential for making an informed decision before accepting an offer.
You can also reclaim input VAT on necessary transaction-related expenses, such as legal fees.
Planning for Inheritance Tax (IHT)
For family-owned businesses, reducing IHT liability through effective planning is crucial.
Gifting shares to family members can reduce the value of your estate, lowering IHT liabilities.
Setting up trusts is another method of managing IHT obligations. Trusts allow you to place business assets or shares in a controlled environment, potentially reducing the IHT burden while maintaining some control over these assets.
Effective succession planning is an essential aspect of passing on a family-run business and can ensure a smooth transition of business ownership, while minimising tax liabilities.
You must regularly review and update your succession plan to ensure you are making tax-efficient choices with the support of a tax expert.
Optimising the structure of the MBO
Deciding to gradually transfer shares over time can help to spread out and minimise the impact of tax liabilities.
Alternatively, an earnout agreement allows you to receive a portion of the company’s earnings as part of the sale, which can distribute tax liabilities over time.
Our advice to sellers
An MBO can be an excellent strategy for business succession, provided it is approached with thorough consideration of all implications, especially those that are tax-related.
Given the complexities involved, consulting with a tax professional is highly advisable to ensure you make informed decisions.
Contact our team for advice on whether an MBO is the best exit strategy for you.