Selling your company for loan notes to defer tax

When you sell your company there are various ways that you can structure the disposal. In particular the way that you receive the disposal proceeds can vary significantly. One of the top preferences for many business owners is of course to sell their shares for cash. The downside with this is that you'll be hit with an immediate tax charge, unless you can arrange to be non UK resident.

In many cases if you're obtaining full business asset taper relief on the disposal this may not be a big issue as you're effective tax rate will be around 10% in any case. But for cases where shares don't qualify for full business asset taper relief, alternatives could be considered.

One of these is to receive loan notes from the acquiring company. A loan note is essentially a debt due from a company. However in tax terms matters aren't so straightforward. The taxman classes loan notes as either Qualifying Corporate Bonds ('QCB's') or Non-Qualifying Corporate Bonds ('Non QCB's).

The difference between these two different types of loan notes is very important if you're selling your company. Although both of them allow you to defer any gain arising on the shares they do it in completely different ways.

QCB's V Non QCB's

I won't go into the different definitions of QCB's and Non QCB's here as this is something your professional advisers can cover, but what you do need to know is that whereas QCB's are exempt from CGT a non QCB's isn't.

So if you receive QCB's in exchange for your shares, the gain is computed but is then deferred until you redeem or sell the loan notes. You'll get taper relief on the orginal shares but once you exchange for the loan notes this then stops (pretty obviously as the loan notes are exempt from CGT). Sounds great! Well it is in most cases, but as always there are exceptions.

You'll find that a QCB loan note is often used if high business asset taper relief has already been obtained (and if you couldn't get a cash sale) as the taper relief already accrued will be available on the future redemption of the loan notes, irrespective of whether the new company is a trading company or not. As any future gain on the loan notes is free of tax this is a win-win situation.

By contrast if you receive non QCB's in exchange for your shares any gain that arises on the future disposal of the loan notes is charged to CGT. This therefore puts Non QCB's at a big disadvantage to QCB's. However, they can still be very useful because of the way the share for loan note exchange rules work.

When you defer the gain on your shares with Non QCB loan notes the loan notes take on the characteristics of the original shares. This means you'll be deemed to have bought the loan notes when you bought the shares and for the same price. It also means that the taper relief ownership period would continue to run from the date you bought the old shares right up to the date you sold the loan notes.

So if you've not got full taper relief on your shares, using Non QCB loan notes could be the one to opt for PROVIDED the company issuing the loan notes willalso qualify for business asset status. If you do this it could then increase the eventual amount of taper relief available. The downside to this is that any uplift in value of the loan notes would be taxed, whereas if you went for QCB loan notes this would be tax free. Of course in either case you can get a deferral of the original tax due on the disposal, its just a case of the later tax implications.

It's a complex area and you should ensure that you discuss this with your professional adviser.