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Selling the business: Shares vs assets

Shared from Tax Insider: Selling the business: Shares vs assets
By Alan Pink, August 2019
Alan Pink contrasts the tax implications of the sale of trading company shares and the sale of the company’s trade and assets.

This article is aimed not just at those running a limited company who are thinking of selling; it’s also potentially of relevance to those deciding how to structure their business. 

In what might be termed the ‘vanilla’ situation, however, you will be running a straightforward trading company that owns a number of saleable capital assets, such as goodwill and the premises from which the business is carried on. A purchaser comes on the scene. What do you offer him? Do you offer him the shares in your company, which is a convenient envelope through which he can acquire all these business assets, or do you offer to sell him the assets themselves out of the limited company? 

In the former case, the vendor is you as the individual shareholder (probably). In the latter case, the vendor is the company itself. 

Comparing the tax effects
These two scenarios can have massively different tax effects, as the following examples show. 

Example 1: Selling the assets
John Knox runs an exceedingly successful publishing company, which owns the rights to a number of bestsellers. He’s approached by a major international publisher, Big Bad Wolf Inc., with a flattering offer for the business, valuing it at £20 million on the back of these popular selling titles. Let’s suppose, for the purposes of this example, that John agrees to sell these titles out of the company for the £20 million valuation. 

When considering the tax implications in this scenario, we need to bear in mind that the company has no base costs for the titles. All of the royalties paid to the authors have been written off year-by-year in the profit and loss account of the company, and duly claimed for corporation tax purposes. So, the £20 million receipt (we’ll assume for simplicity that the other assets and liabilities of the company balance out) will basically comprise all capital gain. The tax on this (at 19%) is £3.8 million. 

Following the sale and the payment of this tax, therefore, the company is no more than a ‘shell’ with £16.2 million cash in it. As John has no plans to continue in business, the obvious thing to do is to wind up the company to get his hands on this cash, and he duly does so. The shares are actually owned equally by John and his wife Elizabeth who is also a director of the company, so fortunately, the capital gains they are treated as making on the winding up of the company are fully covered by their available entrepreneurs’ relief allowances. 

After paying capital gains tax on the gain of £16.2 million, which is as near as makes no difference £1.62 million, they have £14.580 million left available to spend on themselves post-tax. The effective overall tax rate on the £20 million gain is therefore 27.1%.

Now consider the effect of doing things the other way, that is selling the shares in the company.

Example 2: Selling the Shares
Suppose the facts are the same as above, except that John agrees that Big Bad Wolf Inc. will buy the shares in his company, rather than buying the assets out of it. Quite simply, the result of this is that John and his wife pay only one effective layer of tax, rather than the two layers paid in the assets sale scenario. 

The rate of tax, on our assumptions, is 10% because entrepreneurs’ relief applies to all the proceeds. Therefore, John and Elizabeth have £18 million left after tax rather than £14.58 million. A difference of £3.42 million. The effective tax rate, of course, is 10% rather than the effective overall tax rate of 27.1% over the two layers under the assets sale route.

So, is the choice between a share sale and an asset sale always a ‘no brainer’? From the vendor’s point of view, this is indeed normally the case. 

However, consider the following scenario where the vendor actually prefers to sell assets. 

Example 3: The ongoing company
Speedy Motors Ltd owns three highly profitable car dealerships, one in England, one in Wales, and one in Scotland. The owner of the company, Mr JLB Matekoni, is approached by a purchaser wishing to acquire the dealership in Edinburgh. He’s very happy to sell, as it happens, because he has plans to expand the Welsh dealership very substantially with the proceeds. 

In this situation, there’s no real alternative to an asset sale, because the purchaser doesn’t want to buy all the company’s trade. It would be prohibitively expensive, in tax terms, splitting up the business and extracting the English and Welsh dealerships (say) and putting them in another company. There would be tax both on the target company itself (on the capital gain deemed to be made on transfer of dealerships) and (depending on how the transfer is structured) on the shareholders themselves by way of an income tax or capital gains tax charge, effectively on the same transactions.

Even assuming this was not the case, though, in the instance of this company there is relief available against the company’s tax on its gain from selling the Scottish dealership. This is ‘rollover relief’, under which the capital gain is deducted from the new expenditure on improving the Welsh dealership, and to that extent doesn’t bear corporation tax.

The purchaser’s point of view
We’ve been talking up to now as though it was only the vendor’s interests which mattered; but, of course, it takes two to tango. The purchaser will obviously have his own view and his own advice on the format in which the purchase should be made. 

These differences are illustrated in the following example:

Example 4: Buying a gain
Mr Ritz has in his sights a successful company which runs three provincial hotels in the north of England. He wants one of those hotels in particular and intends to keep it to run long term. The other two he intends to refurbish and, ultimately, sell once he has increased their profitability. The total value of the hotels is £5 million, but the target company bought them many years ago when they only cost a tenth of that figure. 

So, if Mr Ritz buys the shares in the company itself, he only has the company base cost of £500,000 (or rather a proportion of it) to offset against the sale proceeds from selling hotels numbers two and three. Tax will become due by the target company (which is now his company) on the difference between this much lower figure and the sale proceeds, even though he has actually paid a proportion of £5 million, effectively, to acquire them. This is sometimes referred to as ‘buying a deferred tax liability’ – in this case, £4.5 million at 19% (assumed rate), or £855,000. 

Mr Ritz goes back to the purchaser and says that, if he insists on selling shares because of the better tax position from his (the vendor’s) point of view, he’ll have to put up with a reduction in the price of those shares of £855,000.

The owner counters by saying that Mr Ritz is effectively saving a considerable amount of stamp duty land tax by purchasing the shares; and, moreover, at least some of this £855,000 deferred tax liability is unlikely to arise in the foreseeable future, because Mr Ritz plans to keep hotel number one indefinitely.

So, in effect, there is very often some last-minute horse trading in these situations, under which a compromise is reached between the interests of the vendor and the purchaser.

Finally, if you do run a business that has lots of divisions like this, which might be sold separately, consider the option of holding them in separate companies, thereby enabling a partial sale of the shares if the purchaser does not want all the assets. This can avoid an extremely expensive (in tax terms) asset sale out of the company. 



Alan Pink contrasts the tax implications of the sale of trading company shares and the sale of the company’s trade and assets.

This article is aimed not just at those running a limited company who are thinking of selling; it’s also potentially of relevance to those deciding how to structure their business. 

In what might be termed the ‘vanilla’ situation, however, you will be running a straightforward trading company that owns a number of saleable capital assets, such as goodwill and the premises from which the business is carried on. A purchaser comes on the scene. What do you offer him? Do you offer him the shares in your company, which is a convenient envelope through which he can acquire all these business assets, or do you offer to sell him the assets themselves out of the limited company? 

In the former case, the vendor is you as the individual shareholder ).
... Shared from Tax Insider: Selling the business: Shares vs assets
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