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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15755
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I have a client who's looking to sell a small engineering business

Resolved Question:

I have a client who's looking to sell a small engineering business and would like a second opinion on the tax position.
He has 2 options:
1.Sell the shares - 2 share in the company both owned by the director, who works full time in the business. Shares bought at nominal value - £1 each. As a going concern the company is valued at around £50k. What would the tax position be if he did this?
2. Sell the fixed assets (mainly machinery) and just the keep the company open for the time being. The machines are quite old but well maintained, nbv of £25,000 (original cost £42,000 s/hand 2 years ago). He has received an offer for the machinery of £150,000 for use in another business, which is an attractive offer, but he's concerned about the amount of tax he'll have to pay.
The offer includes taking the director onto the other company's payroll for 2 years at a salary of £30k pa. His other income is £8,300pa state pension. What would the tax position be if he takes this route and what options are there to reduce double taxation?
Let me know if you need more info and an indication of the fee for advice. Thanks.
P J Fallon
Submitted: 1 year ago.
Category: Tax
Expert:  TonyTax replied 1 year ago.
Hi. Let me take a look at this and I'll get back to you.
Customer: replied 1 year ago.
Ok thank you. I'll wait to hear further. Peter
Expert:  TonyTax replied 1 year ago.
Hi again.
1 If your client sold the shares in the company, he could claim entrepreneurs relief provided he met the criteria set out in HS275 (link below). That would limit any Capital Gains Tax charge to 10%. On a £50,000 gain from the sale of goodwill with the first £11,100 being tax free due to the CGT exemption, there would be a CGT charge of £3,890.00 (£50,000 - £11,100 x 10%).
https://www.gov.uk/government/publications/entrepreneurs-relief-hs275-self-assessment-helpsheet/hs275-entrepreneurs-relief-2015
2 If the company sold the plant and machinery there may be a clawback of capital allowances claimed as a company only gets tax relief through capital allowances for the net cost of the asset. That would incur a corporation tax charge at 20% or 21% or a combination of the two rates depending on the company's accounting date.
If the plant and machinery is sold for more than it cost, then there would be a capital gain, the difference between the disposal proceeds and the original cost, on which corporation tax would be charged. Take a look at the link below for the current corporation tax rate.
https://www.gov.uk/corporation-tax-rates/rates
If the director has an income of £38,300 per annum, the deduction of the personal allowance of £10,600 would leave taxable income of £27,700 on which tax at 20% would be £5,540. There would be no employee NIC to pay as he is over state pension age. Take a look at the link below for personal allwoances.
https://www.gov.uk/government/publications/tax-and-tax-credit-rates-and-thresholds-for-2015-16/tax-and-tax-credit-rates-and-thresholds-for-2015-16
Your client should try to negotiate for the shares in his company to be part of the £150,000 deal so he only pays CGT at 10% as opposed to the company paying corporation tax at 20%. Obviously, the potential buyer wants to claim capital allowances on the plant and machinery to get a tax break so it's a matter of trying to compromise.
I hope this helps but let me know if you have any further questions.
Customer: replied 1 year ago.
Thanks for the response. It's the following bit of your reply that my client is really trying to get his head around.
"Your client should try to negotiate for the shares in his company to be part of the £150,000 deal so he only pays CGT at 10% as opposed to the company paying corporation tax at 20%. Obvioulsy, the potential buyer wants to claim capital allowances on the plant and machinery to get a tax break so it's a matter of trying to compromise."Is it possible to expand on this and possibly give a worked example - if, say, the shares were worth £50k (basically goodwill) and the assets disposed of for £100? Thanks
Expert:  TonyTax replied 1 year ago.
Leave it with me while I do some calculations.
Expert:  TonyTax replied 1 year ago.
If the plant and machiney was sold for £100,000, having cost £42,000 originally, there will be a capital gain of £58,000 on which corporation tax at 20% would be payable, possibly a bit more depending on the company's accounting date.
If the full cost of the plant and machinery has been claimed in capital allowances, then £42,000 of allowances will be clawed back by HMRC giving rise to a corporation tax charge at 20%, possibly a bit more depending on the company's accounting date. You cannot get capital allowances on more than the net cost of a piece of plant and machinery.
If the shares were part of the deal, the director would pay CGT personally at 10% as set out in my earlier post. That will save at least 10% in tax, more because he will get £11,100 in gains tax free.
Customer: replied 1 year ago.
Thanks very much. One final question if I may - asked by client:-
Plant and machinery is sold £100k, money received by company and corp tax paid on it. Shares sold £50k- money received by director - CGT relief obtained.
Q. "How do I get the money from the sale of assets and what is the tax implication for me personally?"
Expert:  TonyTax replied 1 year ago.
If the shares are being sold to the same buyer as that of the plant and machinery, the price being paid for the shares should reflect the overall value of the company. It has goodwill valued at £50,000 and £100,000 in assets.
If the plant and machinery is being sold to a separate buyer before the shares are sold to the other buyer then that cash can be take as a dividend but with higher rate tax implications. The profit from the sale of assets forms part of the company's profits. It can be extracted by way of dividend which will give rise to a higher rate tax liability if the director's income exceeds £42,385 (2015/16). It could also be taken as salary but that has income tax and employer NIC implications.
If the company was being liquidated and struck off the Companies House register, you could go through a formal liquidation and extract all the cash as capital and pay 10% CGT using entrepreneurs' relief.
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15755
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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