You have decided to sell your company and have a capital value in mind. You now want to ensure you negotiate the best deal possible, and receive the most tax efficient remuneration for your efforts. When you sell your business, a variety of payment methods are offered. The preferred payment method is, obviously, cash. However, cash is immediately taxable. Alternative methods that are frequently offered, and should be considered, are payments through shares and loan notes.
If your company is being acquired by another business, they often offer shares in place of cash. The major advantage of shares is that you are more likely to get a better price, as, depending on the market, the shares can be sold for more than the business is worth. You also do not have to pay Capital Gains Tax (CGT) when cashing in your shares. However, the downside is that the share value is not secure and can fluctuate. You are therefore not guaranteed to sell your shares at or above the market value at which they were issued. It is therefore up to you to decide how much risk you would like to take when selling your business.
If an acquiring company does not have the full amount of funds to buy your business, they can offer you loan notes. A loan note is similar to an investment bond with a bank, paying interest for a set period before you cash it in. The major benefit of loan notes is that CGT is not applied until you cash the loan in, and even then you can further reduce the tax you pay by releasing the value of the note over several years. This utilises your annual exemption each year to reduce the tax payable. Loan notes are classified as either Qualifying Corporate Bonds (QCBs) or Non-Qualifying Corporate Bonds (Non-QCBs). The difference between the two is that QCBs are exempt from CGT, non-QCBs are not. However, there is still a risk with QCBs; if the buying company goes bust CGT on the loan will have to be paid in full. Initially, QCBs may seem the best option in regards to tax, however, when you cash in the loan CGT will then be applied at the full rate, barring any exemptions. With cash, on the other hand, you do need to pay CGT, but it will be at the entrepreneur’s relief rate of 10%. There is no payment method that suits all, therefore, it is important that you plan ahead and decide which method is best for you. We advise seeking help from a tax adviser who will be able to assess your situation and advise on the best remuneration for you and your business.