Selling a Business? Here are some Tax Considerations to help you decide between Share Sale or Asset Sale
- Corporate Law
- 9th Mar 2022
The sale of a company's business can be structured as either: • a share sale – being a sale of shares in the company by its shareholders; or • an asset sale – being a sale of assets owned by the company ...
By Rachel Owen
MLP Law
The sale of a company’s business can be structured as either:
• a share sale – being a sale of shares in the company by its shareholders; or
• an asset sale – being a sale of assets owned by the company
In a share sale, ownership of the company itself is transferred to the buyer. The company retains its assets (and liabilities) and continues to operate the business under the buyer’s ownership.
In an asset sale, a buyer is able to cherry pick which assets and liabilities (if any) and which parts of the target business it acquires.
Generally speaking, a seller (or sellers) will usually prefer to sell the shares of a company, giving them a clean break from the company and its business, whereas a buyer may prefer an asset purchase in order to avoid acquiring any unexpected liabilities of the company.
However, the relative pros and cons need to be properly considered before deciding which structure (shares or assets) should be used.
Whether the transaction is structured as share sale or an asset sale depends on factors including:
• the bargaining position of the parties
• the nature of the assets used in the target business
• any difficulties in transferring the assets including obtaining third party consents for the assignment of key contracts or leasehold properties
• the existence (or risk) of outstanding historical liabilities of the company, and
• the tax consequences of the particular transaction
Share sales — tax advantages for seller
Some of the tax advantages of a share sale for the seller include:
• Disposal of the company complete with all historical, continuing and any other
liabilities.
Essentially, the seller is able to walk away completely from the business it wishes to sell and have a clean break. However, the price the seller pays for passing responsibility for the company’s history to the buyer is, subject to the relative negotiating power of the parties, the provision of warranties and a tax indemnity (tax covenant) for everything relating to the period pre-completion.
• Where the seller is an individual, business asset disposal relief (formerly entrepreneurs’ relief) may be available to reduce the taxable gain provided certain conditions are satisfied.
• Where there is a corporate seller, substantial shareholdings exemption relief (SSE) may be available.
Asset sales—tax advantages for buyer
Some of the tax advantages of an asset sale for a buyer may include:
• By selecting the assets and business acquired, the buyer should be able to leave any historical tax liabilities with the selling company and so essentially, the buyer avoids taking responsibility for the target company’s historical, continuing liabilities and any potential and secondary tax liabilities.
• In an asset sale, the assets used in the target business are acquired individually and the price paid for each individual asset (usually the price allocated in the asset purchase agreement) will form part of its base cost in calculating any future chargeable gain (or allowable loss).
• The buyer may be able to obtain reinvestment roll-over relief (in connection with both gains realised on the disposal of tangible assets and credits accruing from the disposal of intangible assets). Where the buyer has made (or will make) gains on the disposal of its own assets (including intangible assets), it may be able to roll-over the arising gain (or credit) into the assets (assuming they are qualifying assets for these purposes and the acquisition is made within certain time limits) newly acquired under the asset purchase agreement.
• The buyer may be able to obtain tax relief for the cost of certain intangible assets acquired in the sale
• The buyer may be able to claim capital allowances in respect of plant and machinery.
Both legal and tax advice should be sought to determine whether the shares or assets route is the best for you and your company
If you wish to discuss the contents of this blog further please get in touch at corporate@mlplaw.co.uk or alternatively call 0161 926 9969.
• a share sale – being a sale of shares in the company by its shareholders; or
• an asset sale – being a sale of assets owned by the company
In a share sale, ownership of the company itself is transferred to the buyer. The company retains its assets (and liabilities) and continues to operate the business under the buyer’s ownership.
In an asset sale, a buyer is able to cherry pick which assets and liabilities (if any) and which parts of the target business it acquires.
Generally speaking, a seller (or sellers) will usually prefer to sell the shares of a company, giving them a clean break from the company and its business, whereas a buyer may prefer an asset purchase in order to avoid acquiring any unexpected liabilities of the company.
However, the relative pros and cons need to be properly considered before deciding which structure (shares or assets) should be used.
Whether the transaction is structured as share sale or an asset sale depends on factors including:
• the bargaining position of the parties
• the nature of the assets used in the target business
• any difficulties in transferring the assets including obtaining third party consents for the assignment of key contracts or leasehold properties
• the existence (or risk) of outstanding historical liabilities of the company, and
• the tax consequences of the particular transaction
Share sales — tax advantages for seller
Some of the tax advantages of a share sale for the seller include:
• Disposal of the company complete with all historical, continuing and any other
liabilities.
Essentially, the seller is able to walk away completely from the business it wishes to sell and have a clean break. However, the price the seller pays for passing responsibility for the company’s history to the buyer is, subject to the relative negotiating power of the parties, the provision of warranties and a tax indemnity (tax covenant) for everything relating to the period pre-completion.
• Where the seller is an individual, business asset disposal relief (formerly entrepreneurs’ relief) may be available to reduce the taxable gain provided certain conditions are satisfied.
• Where there is a corporate seller, substantial shareholdings exemption relief (SSE) may be available.
Asset sales—tax advantages for buyer
Some of the tax advantages of an asset sale for a buyer may include:
• By selecting the assets and business acquired, the buyer should be able to leave any historical tax liabilities with the selling company and so essentially, the buyer avoids taking responsibility for the target company’s historical, continuing liabilities and any potential and secondary tax liabilities.
• In an asset sale, the assets used in the target business are acquired individually and the price paid for each individual asset (usually the price allocated in the asset purchase agreement) will form part of its base cost in calculating any future chargeable gain (or allowable loss).
• The buyer may be able to obtain reinvestment roll-over relief (in connection with both gains realised on the disposal of tangible assets and credits accruing from the disposal of intangible assets). Where the buyer has made (or will make) gains on the disposal of its own assets (including intangible assets), it may be able to roll-over the arising gain (or credit) into the assets (assuming they are qualifying assets for these purposes and the acquisition is made within certain time limits) newly acquired under the asset purchase agreement.
• The buyer may be able to obtain tax relief for the cost of certain intangible assets acquired in the sale
• The buyer may be able to claim capital allowances in respect of plant and machinery.
Both legal and tax advice should be sought to determine whether the shares or assets route is the best for you and your company
If you wish to discuss the contents of this blog further please get in touch at corporate@mlplaw.co.uk or alternatively call 0161 926 9969.
About the expert
Stephen Attree
Managing Partner
Stephen is the Owner of MLP Law and leads our Commercial, IP and Dispute Resolution teams which provide advice on all aspects of the law relating to mergers, acquisitions, financing, re-structuring, complex commercial contracts, standard trading terms, share options, shareholder and partnership agreements, commercial dispute resolution, joint venture and partnering arrangements, IT and Technology law, Intellectual Property, EU and competition law, Brexit and GDPR.
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