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By Sue Leathem

JR Watson

IT sounds obvious, but there are plenty of pitfalls on both sides for buyer and seller.

The seller needs to be happy that it has complied with all relevant tax law in the years leading up to the sale date. All those minor fiddles might result in sleepless nights once you realise the extent of the tax warranties or covenants that the buyer has requested. As well as the anguish pre-sale, should a problem arise post sale, the stress may be accompanied by a payback of part of the sale proceeds.

A common misunderstanding when I talk to people who are looking to sell is that they can keep the property. This is obvious strategy to continue income in retirement. If the property is held within an unincorporated business, that is fine. However, if a business has been able to purchase a property, it is probably a company, because it will have been more tax efficient to buy through a company.

This good tax planning, done many years ago, now has a significant tax downside. The company will have a tax bill on the increase in value from purchase until the date of transfer to the seller. This is, in money terms, mitigated by the low rate of corporation tax and relief for indexation up to 31 December 2017. The seller acquiring the property personally will have a liability for stamp duty land tax. There is no easy answer to this conundrum.

It might be sensible to take the property out before starting to sell the business. This will give time to get the right structure in place.

The seller is happy because they know the proceeds will suffer a maximum tax rate of 10 per cent (at the moment anyway). But HM Revenue & Customs may challenge the claim to entrepreneurs’ relief.

It is absolutely essential to check that your ownership and the business activity does make the gain eligible for entrepreneurs’ relief. Then you need to ensure that you do not wreck this claim by, for example, resigning as a director before the share sale goes through. Mixing an investment activity such as property ownership with a trading can also bring into question whether entrepreneurs’ relief is due.

The buyer is excited. They want to buy the business. They have identified a synergy with their business.

Tax – what tax do they need to worry about? They have to pay stamp duty on the purchase – that is budgeted for.

The solicitor will make the enquiries and put the necessary clauses in the draft agreements. When it gets to the tax clauses, just remember your chats with and visits to the business. What is their tax ethos? Is there any suggestion that they view tax as being perhaps optional? ‘Cash deals’ offered at lower prices than invoiced sales? With an unincorporated business you will not be responsible for historic tax evasion. But will the customers be happy that you will not act likewise? With a company, past indiscretions stay with the company. The purchase agreement might give you redress – but at what stress?

Both seller and purchaser need to get their ducks lined up.

Sue Leathem is a partner in J R Watson, 11 Cheyne Walk, Northampton, NN1 5PT and can be contacted on 01604 630745 or via www.jrwatson.co.uk

Companies mentioned in this article

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