Zero tax when selling your business with a holding company

With recent changes to Entrepreneurs Relief (now Business Asset Disposal Relief) many fear that the days are numbered for paying 10% tax when you sell your business.

So, is there another way? Yes there is.

Under current tax legislation, a limited company that owns more than 10% of the shares in a trading company for more than a year qualifies for the substantial shareholding exemption. This means that if the company sells those shares it doesn’t have to pay any Corporation Tax on the sale.

As a result it is possible to sell your trading company and pay no tax at all, and we have a couple of clients that have done exactly that.

There must be a catch, right? Well yes there is, and in some cases it’s a pretty big one! The proceeds from selling your company are now in your holding company, and you’ll face tax withdrawing the funds personally. Usually that means dividend tax on getting at the proceeds from the sale, which rather defeats the purpose!

But it all depends what you plan to do with those proceeds. If the plan is to payoff your mortgage, or buy a mansion and/or a fleet of supercars, then as above, having a holding company isn’t much of an advantage (although see the note below about liquidating the holding company to put you back in the same position as you would have been by holding the shares in the trading company directly).

However, we see people selling businesses and investing the proceeds in other businesses, or buy to let properties, or stocks and shares, or more often than not a mixture of all of these! In this case there is no need to withdraw the proceeds personally and you can achieve 0% tax on selling your trading business!

So, what if you don’t know yet what you want to do when you come to sell the trading company in the future? In this case bear in mind that you always have the option of liquidating the holding company to access the proceeds as capital, which then puts you in the same position as if you held the trading company shares personally, and you’ll face Capital Gains Tax, with the same reliefs.

There are of course other advantages to having a holding company, such as protecting surplus profits from the trading company and giving you a vehicle to invest those profits separately to the trading company. If you plan to invest surplus profits in buy to let properties, for example, and wish to take a mortgage then you’ll find that most mortgage lenders won’t lend to a trading business, however successful it might be, and therefore you’ll need a separate company (special purpose vehicle, SPV) to hold the property in.

Moving your shares into a holding company needs careful consideration and there is a process to follow to do so without triggering Capital Gains Tax or stamp duty on the current value of the shares. This is called share for share exchange, and we have carried out this work for a number of clients over recent years, and are well placed to assist.