Tax Planning for the Sale of a Trading Division

Company shareholders planning a sale of their entire company may have had the differences of an asset sale and a share sale explained to them. It is usually the case that the shareholders desire a share sale, to take advantage of the 10% rate of Capital Gains Tax for sale of shares in trading companies, whereas the purchaser may desire an asset deal where they are not buying the history of the company and its “skeletons in the closet”, and they will also benefit from the tax relief available on tangible and intangible assets acquired. Usually these opposing methods are resolved by negotiation.

But what if the owners of a company that operates more than one trade within a stand-alone company wish to dispose of only one part of their company?
Prior to the Finance Act 2011 any such disposal would usually have been an asset sale, unless longer term tax planning had been implemented in anticipation of such a sale. This would result in any assets disposed of at a profit being charged to corporation tax. This is at odds with a trading group selling one of its trading subsidiaries where such a share sale is likely to be exempt from corporation tax as a result of a relief known as the Substantial Shareholdings Exemption (SSE).

The Finance Act 2011 has corrected this so that commercial decisions on the sale of parts of a business are not influenced by the structure of that business.

Therefore, if a sale of a division is desired, the trade and related assets can be transferred into a new subsidiary and the shares in that subsidiary can be sold a short time afterwards. Previously, the trade was required to have been run in the subsidiary for at least 12 months but the new rules only require that the trade existed for 12 months in the transferor company.

Secondly, the rules that give rise to a “degrouping” charge in the event of a company leaving a group within six years of a chargeable to tax asset, such as property, being transferred to the company have also been altered. Now the gain falls upon the transferor company and is added to the total gain. Thus if the share disposal attracts SSE, the degrouping charge also falls part of the exempt gain.

When planning to take advantage of these attractive tax reliefs, there are a few pitfalls to be aware of. Firstly, a stamp duty land tax (SDLT) degrouping charge will still arise on any property that was transferred within a group if the recipient company leaves that group within three years (but if the disposal was structured as an asset disposal there would be an SDLT charge on the purchaser anyhow, so it is just a change in entity making the payment).
Secondly, whilst this planning works for intangible assets such as goodwill on a trade that commenced pre 1 April 2002 it would trigger a tax liability on post 1 April 2002 goodwill and other intangibles. Thirdly, it will still be necessary to convince the purchaser to enter into a share as opposed to an asset transaction but this should prove easier if the company was established purely for the sale. Finally, it is necessary to ensure that all of the other necessary criteria in respect of SSE are met.

This is merely an overview of what is required but, if planned correctly, it does now provide a route for companies in disposing of trading divisions in a very tax efficient manner.

If you wish to discuss this area of tax planning in further detail please contact us.
 
Nigel Holmes
Director - Corporate Tax
 

For more information contact Nigel Holmes on 01228 690200 or email nigel.holmes@armstrongwatson.co.uk

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