The building blocks of accountancy
is for eXit strategy
In our A-Z of top tips, Julia Burn reaches the letter ‘X’.
The last 19 months have been difficult for many businesses and several of them, sadly, had to cease their activities and consider an exit plan. Others, on the other hand, have decided to retire sooner.
Exiting a business is not a straightforward process and, once you are satisfied that it is the right time for you and your business, various matters need to be considered.
You could exit your business in different ways. If you are running a family business, you may consider passing it down to the younger generations in your family. If the business has run its course, you may decide to liquidate it. Or you may simply sell it.
The taxation treatment will depend on how you wish to exit and you should discuss this and your exit route with your accountant.
Gifting shares in your business to your descendants could be an attractive form of inheritance tax (IHT) planning.
If your children are in the medical profession and you wish for the business to continue, this may be something to consider, as you could then still play some part in the business; for example, as a consultant.
Gifting shares could create immediate capital gains tax (CGT) consequences. Gifts to connected parties would be deemed to take place at market value. The capital gain would be calculated as the difference between the market value and what you paid for the shares.
Assuming certain conditions are met, hold-over relief could be claimed to defer any gains. This means that any gains made on the transfer would be held over and taxed on the recipients at some point in the future when they dispose of the shares.
Assets qualifying for hold-over relief would include gifts of unquoted shares in personal trading companies. They would not include unincorporated businesses, but assets used in a business – for example, land and property – could qualify.
These gifts could fall with the IHT regime if you do not survive seven years after your gift. But Business Property Relief (BPR) may still be available which would result in no or reduced IHT. BPR is not available on gifts of cash.
If your private practice business has run its course, you may wish to liquidate it, as some highly specialised consultants I know have done in the last few years.
You may need to engage services of a liquidator, especially if you have a valuable business, to help you secure the most efficient tax treatment. This is a complex area and you would need to consult your accountant.
Any cash drawn as a result of a formal liquidation would often be treated as a capital disposal and would be subject to CGT for higher- and additional-rate taxpayers at 20%, instead of dividend tax at 32.5% or 38.1%, depending on pre-tax personal income.
Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief, may be available to private doctors if all qualifying conditions are met and you are making a material disposal of a business asset – including a liquidation – which you have owned for at least two years before the disposal/liquidation.
Different conditions apply to different assets – for example, shares v unincorporated businesses – and so you should seek professional advice if this a route that you decide to take.
As long as you have not previously used any of your BADR lifetime limit, any distributions of up to £1m would be taxed at 10% and 20% thereafter.
Assuming you have no other capital gains, you should be entitled to an annual exemption, currently £12,300, which could be offset against the gains, subject to 20% tax.
If no BADR is available to you, the liquidation distribution – less available annual exemption – will be taxed at 20% as normal.
In the case of an informal liquidation – that is to say, not using a professional liquidator – HM Revenue and Customs will seek to tax most of the distribution as a dividend. The dividend tax rates are 7.5%, 32.5% and 38.1% depending on the income tax band they fall into.
Selling your business would have similar consequences to a formal liquidation; that is to say, any gain made on the disposal would be subject to CGT and a claim for BADR may be available.
In the case of a sale of shares, the buyer would be liable to stamp duty calculated as 0.5% of the consideration they pay you.
Any exits would be reportable events for tax purposes and your accountant will be able to advise you on the reporting requirements. Generally, such transactions would need to be disclosed by 31 January following the end of the tax year of the transaction.
Some medical practitioners may have decided or been forced to exit their business sooner due to the pandemic and its effect on their business activities.
Due to the availability of various options, every exit will differ and not every strategy will suit everyone’s needs.
There are ways of minimising the tax exposure and deciding how to exit may play a big part in planning for the future.
Getting professional advice will help you consider pros and cons of your exit strategy and decide on how to structure your exit in the most tax-efficient manner.
Julia Burn (right) is a director at Blick Rothenberg and part of the team that advises medical practitioners