Selling your company: why the tax work starts 12 to 24 months before the deal

By the time a buyer sends heads of terms, most of the tax outcome of a sale is already settled. Who owns the shares, where the owner lives, how long the shares have been held and in what form: these are facts the tax rules look at, and many of them have minimum holding periods measured in months or years. A founder who starts planning when the data room opens is usually choosing between options that were set a long time ago.

Planning early does not mean anything aggressive. It means arranging ordinary, well-understood structures in good time, for real commercial reasons, so that the reliefs the law already provides are available on the day.

Who should be the seller?

The first question is whether the shares are sold by the founder personally or by a holding company the founder owns. The two routes are taxed in very different ways.

• A personal sale is taxed as a capital gain of the individual, in the country where they are resident. In the UK, Business Asset Disposal Relief can reduce the rate on the first £1 million of qualifying lifetime gains, subject to conditions on shareholding, role and holding period that must be met for at least two years.
• A sale by a holding company can fall under a participation exemption. Several EU countries exempt all or most of a company's gain on selling a substantial shareholding (the Netherlands and Luxembourg exempt qualifying gains in full; Germany exempts 95%), and the UK has the Substantial Shareholding Exemption for disposals of trading companies.
• The holding route defers tax. The proceeds sit in the holding company, and tax arises when they are paid out to the founder. That suits founders who intend to reinvest; it helps less if all the cash is needed personally.

Each exemption comes with conditions: a minimum percentage, a minimum holding period (often 12 months), sometimes a requirement that the company being sold is trading. Inserting a holding company shortly before a sale may not meet these tests, and tax authorities look closely at reorganisations that appear to exist only for the deal. In the UK a share-for-share exchange into a new holding company can usually be made without an immediate charge, and advance clearance from HMRC is available and worth obtaining.

Residency and timing

Gains are usually taxed by the country where the seller is resident when the sale happens. Founders sometimes consider moving before a sale, and it can be legitimate, but the rules are built to catch late moves. The UK taxes gains made during a period of non-residence of five years or less when the person returns. Several European countries charge an exit tax on substantial shareholdings when a resident leaves. A move needs to be genuine, and it needs to happen well before a deal is in motion.

Earn-outs and deferred consideration

Buyers often pay part of the price later, depending on performance. The tax treatment of that later payment is easy to get wrong. Depending on the country and the drafting, an earn-out may be taxed on its estimated value at completion, may be treated as a separate asset taxed when received, or, if it depends on the founder continuing to work in the business, may be treated as employment income taxed at income tax rates. The wording of the sale agreement decides which, so we review it before signature.

Before you sign

• Confirm who the seller is and that any relief you are counting on has its holding period met on the completion date.
• Check your own residence position for the tax year of the sale, and for the years after it.
• Read the earn-out, retention and non-compete clauses for their tax treatment as well as their commercial effect.
• Model the cash you will actually receive after tax, and when, under each option.
• Tidy the company's own tax affairs before due diligence starts: open enquiries and missing filings reduce the price.

If you are thinking of selling in the next two years, call us before you sign anything with a buyer or an adviser. The first consultation is free and lasts 30 minutes, and every request is answered within 24 hours.

General information, not advice. Tax rules change and depend on your facts. Greyridge Global coordinates and delivers cross-border tax and corporate work through appropriately licensed professionals in each jurisdiction. Legal, tax, immigration, fiduciary, and regulated services are provided by qualified advisors engaged for your matter. Nothing on this page is tax or legal advice.