There comes a time in every business owner's life when retirement looms and thoughts turn to succession planning. Planning should ideally start two years before the date of disposal to preserve Business Asset Disposal Relief (BADR), if applicable, and optimise the timing of tax payments.

The most tax-efficient structure depends on the seller's goals:

· If the aim is to minimise risk and tax liability up front, a full cash sale (with BADR) is probably the best option.

· If deferment of capital gains tax (CGT) with spread payments is the aim, then loan notes should be considered.

· If it is felt that the company will grow, an earn-out can increase total proceeds but carries more risk.

BADR

To claim BADR, the company must be a trading company (or the holding company of a trading group) and the director shareholder must own at least 5% of the company’s ordinary shares for at least two years before sale.

Those shares must permit the shareholder to have at least 5% voting rights and :

· entitlement to at least 5% of the profits available for distribution; and

· 5% of the distributable assets on a winding up of the company; and

· 5% of the proceeds in the event of a company sale.

BADR reduces the tax rate to 10% (increasing to 14% for 2025/26 and 18% for 2026/27) on qualifying business disposals, applying to the first £1 million of lifetime gains, and is therefore particularly beneficial for higher and additional rate taxpayers who otherwise would be taxed at 24%. However, should the gain exceed £1 million, any excess is taxed at the usual 24% CGT rate for higher and additional rate taxpayers only. Generally disposal will be of the whole business but it is possible to claim BADR

on a partial sale. BADR must be claimed on or before the first anniversary of the 31 January following the tax year in which the disposal occurs.

Deferred Cash Consideration

When a company is sold with cash payments, HMRC treats the gain as taxable in the tax year of completion, i.e. instalment payments do not spread the CGT liability. Therefore, the seller may have to pay CGT by 31 January following the end of the tax year of sale, even though not all of the cash has been received. However, sellers can request HMRC to allow tax payments in instalments, provided these instalments are received over a period of at least 18 months and continue after the 31 January tax payment date.

Loan notes (deferred payments)

Accepting qualifying loan notes (e.g., unquoted company shares or corporate bonds – QCB) in all or part payment can enable the CGT to be deferred until the notes are redeemed or sold. BADR is normally lost as QCBs are not chargeable assets for CGT purposes (because the acquiring company will not be their ‘personal company’). Sellers will be liable to CGT on the deferred QCB gain at the prevailing tax rate in the tax year of repayment (when the CGT rate may or may not be higher than the current 24%).

However, an election can be made to trigger CGT immediately, allowing BADR to be claimed on the gain made, chargeable in the tax year of the share sale. Where an election is made, sellers must ensure they have sufficient funds from the deal to cover CGT on both cash and loan note considerations by 31 January following the tax year of sale.

If the loan notes are non-qualifying (e.g., redeemable within six months or bearing interest), any gain can be deferred so that it will crystallise when the security is redeemed or disposed of, or ceases to qualify as a security. However, no BADR can be claimed.

Earn-outs (contingent payments)

If part of the sale price depends on future business performance, CGT is initially calculated based on a reasonable estimate of those future earn-out payments. The

additional cash to be received as an earn-out is considered an unascertainable amount and treated as a separate asset. BADR may still apply, but only to the portions of the gain meeting the criteria.

For example, the seller's company value increases by 10% in the year after sale, and the agreement states that the seller will receive a cash sum equal to 5% of the net profit after tax. This right to receive 5% of the profit has a value, eligible for BADR as consideration for the sale of trading company shares, taxed in the year of sale. However, when the additional cash gain is ultimately received, it will be considered a disposal of a ‘chose in action' (rather than the shares) and BADR will not be applicable.

If the earn-out is received in shares instead of cash, the gain may be rolled over, deferring CGT until those shares are sold.