Avoiding CGT pitfalls: unexpected tax liabilities on business sales
Two recent first-tier tribunal tax cases, which were very similar in terms of the facts, show the importance of taking expert advice on structuring the consideration mechanisms for business sales.
In both cases (McEnroe and another v HMRCÂ [2022]Â UKFTT 113 (TC) and Ignatius Tedesco v HMRC [2022] TC8498) shares in a company were sold and the company had debt within it.
The sale and purchase agreement (SPA) in both cases stated the amount payable for the shares to be the gross value of the company on the assumption that all debt will be cleared by completion. The selling parties were responsible for clearing the debt within the companies.
In one case the sellers reported to HMRC the gross value as included in the contract but also included a deduction in their capital gains tax computations for the cost of repaying the company loans. In the other case, the net amount (the stated consideration less the loan repayment amounts) was reported as sale consideration giving the same tax effect.
In both cases, it was found that the gross amount was taxable and there was no relief for the loan repayments. In one case this resulted in £69k of additional tax being due and an estimated £220k in the other case.
Conclusion
Had proper advice been provided at the time of the sale a simple alteration to the SPA terms would have resulted in only the net amounts being taxable, providing considerable savings.
Ballards LLP has extensive experience in advising on corporate transactions and can assist businesses of all sizes to maximise the owners’ returns through assistance with deal negotiation, structuring and tax planning. If you would like more information in relation to the support we can provide please contact Martin Adams at martin.adams@ballardsllp.com or on 01905 794 504.
Disclaimer. This article has been prepared for information purposes only. Formal professional advice is strongly recommended before making decisions on the topics discussed in this release. No responsibility for any loss to any person acting, or not acting, as a result of this release can be accepted by us, or any person affiliated with us.
