Allocating proceeds to reduce tax on a business disposal
This is one of the key issues relating to the disposal of a sole trader business.
The proceeds allocated to the various assets will have implications for the seller as well as the purchaser.
Any apportionment of the consideration as reflected in the sale and purchase agreement is unlikely to be disturbed by Revenue and Customs, provided the disposal is between unconnected parties and appears reasonable.
However, the Revenue does have the power to adjust the apportionment where it is not 'just and reasonable'. Accordingly, any apportionment that is made should be capable of justification in the event that the taxman requests further details.
For the seller, the allocation of proceeds will typically have two main implications in that it will affect both the capital gains and capital allowances position.
For the purchaser the allocation will impact on the amounts on which capital allowances can be claimed and also the costs of the assets for capital gains tax purposes.
Example
Simon is disposing of his restaurant business. The total disposal proceeds are £560,000 and he wishes to consider the allocation of these proceeds between land and buildings, fixtures and fittings and goodwill.
Capital Gains Tax
We assume the total original cost of the land and buildings is approximately £480,000.
If the proceeds allocated to the land and buildings were less than the £480,000 cost then a capital loss would arise to the extent that the proceeds were less than £480,000. For example, if the proceeds allocated to land and buildings were £400,000 then a capital loss of £80,000 would arise. This loss could be offset against other gains in the same tax year and if not fully relieved could be carried forward and offset against future capital gains.
If the proceeds allocated to the land and buildings were more than £480,000 a gain would arise. However on the basis that the land and buildings were used for the purposes of Simon's restaurant business the gain would qualify for Entrepreneurs Relief.
If, for instance, £500,000 was allocated to the property, the gain of £20,000 would qualify for Entrepreneurs Relief and be taxed at 10%.
There will be no CGT on the fixtures and fittings provided the cost and disposal value of each individual asset is less than £6,000 and the asset disposed of is moveable property. If the fixtures and fittings were not in this definition, a chargeable gain could arise.
However, if we assume that the cost of the fixtures and fittings was £125,000 and provided the proceeds allocated to these assets is less than £125,000, no gain will arise. It is unlikely to be possible to crystallise a capital loss on the fixtures and fittings as the loss would need to be reduced by the capital allowances already claimed, thereby reducing/eliminating any capital loss.
Any proceeds allocated to goodwill (assumed cost of nil) would result in a gain but would again qualify for Entrepreneurs Relief.
It would make sense to maximise the proceeds to the tax exempt element of the fixtures and fittings where possible. However, say the split of proceeds is:
Land & buildings = £400,000
Fixtures & fittings = £125,000
Goodwill = £35,000
Total = £560,000
In this case, the gain on the goodwill could be offset by the capital loss on the disposal of the land and buildings. Clearly, any allocation would have to be reasonable. However, there is usually room for adjustment to the allocation to optimize the tax position.
Capital Allowances
Any disposal proceeds allocated to fixtures and fittings would be deducted from the capital allowances pool, provided capital allowances had been claimed on these assets. This could lead to a balancing adjustment as indicated earlier. The extent of the adjustment will depend on the 'value' of the capital allowances pool at disposal.
If the pool value was £100,000 at the date of disposal then a balancing charge of £25,000 would arise. This would be treated as an add-back in the final tax computation. If the proceeds allocated to fixtures and fittings were decreased by £20,000 and added to the goodwill allocation, then no capital gain would arise and the balancing charge would be reduced to £5,000.
Proceeds allocated to land and buildings and goodwill will not impact on the capital allowances position, unless industrial buildings allowances or hotel allowances have been claimed on the property. These allowances have been partially withdrawn from 2008 and from April 2011 have been withdrawn completely.
Balancing Charges
It used to be possible to avoid income tax on balancing charges in the capital allowances pool by incorporating the business (ie transferring all the assets to a company owned by the proprietor) and then selling the shares in the new company. While it is still possible, this technique may have an adverse effect on the vendor's Entrepreneurs Relief position as an incorporation would 'reset' the vendor's Entrepreneurs Relief qualifying holding period. If the shares were then sold in the short term, little or no Entrepreneurs Relief would be available.
It is likely that substantial amounts of Entrepreneurs Relief will have accrued on the business being sold (such as goodwill and property) and it may therefore now be attractive for a trader to sell the assets as opposed to an incorporation and sale of shares, even if this means a balancing charge is triggered.
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About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
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Disclaimer
=============================================================i) Please note that the articles/answers contain general guidance only and do not constitute accountancy, tax, investment or other professional advice.
ii) The contents of this article/answer are for information only and are intended to assist readers in identify any tax planning opportunities that may be available to them. The information contained in this answer is not intended to be a substitute for taking proper taxation advice and should not be relied upon in this way. Always consult a qualified accountant or taxation adviser. Your situation will then be looked at individually and specific advice relevant to your circumstances can be given. The Expert does not accept responsibility for any loss arising as a result of reliance on any information contained in this answer.
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