Owner-managed businesses: exit strategies before impending business asset disposal relief changes
With the upcoming changes to the rate of business asset disposal relief (BADR) from 6 April 2025, now is the time for business owners to evaluate their exit strategies and take action to maximise their post-tax cash. Completing a sale before 6 April 2025 could save owners 4% in tax before the BADR rate change, equating to a tax saving of £40,000 on a gain of £1million.
Key changes to BADR:
- From 6 April 2025: the BADR tax rate will increase from 10% to 14%.
- From 6 April 2026: the BADR tax rate will further increase from 14% to 18%.
Whether the goal is to pass the business over to the employees who are key to the successful running of the business, attract a third-party buyer, pass it down to the next generation or cease trading completely, choosing the right path requires thoughtful planning.
This article explores the key exit strategies open to business owners.
Sale to an employee ownership trust (EOT)
EOTs are a highly advantageous option for business owners seeking to secure a seamless exit that also provides benefits and security to their employees. These work particularly well where there is no immediately obvious or acceptable third-party buyer.
Advantages:
- No capital gains tax on the sale of the shares for the vendor.
- Vendors can retain a non-controlling stake in the business.
- Allows for tax-free bonuses of up to £3,600 each year to be paid to employees.
- Retains business stability and relationships with employees, clients and suppliers.
- Offers a smooth transition, as the team already knows the business.
Challenges:
- The company must qualify as a trading company for tax relief to be available, and businesses need to consider the presence of any non-trading assets which may impact this status.
- The consideration is payable on deferred terms over several years. This may not provide the immediate financial return of other strategies and requires confidence in the employees to continue running a profitable business.
- Various conditions must be continuously met for the tax relief to be available. If a disqualifying event occurs within the first four tax years following the tax year of disposal, the EOT relief will be withdrawn, triggering a capital gains tax charge.
Employees will be taxed at income tax rates on any money distributed from the trust.
Management buy-out (MBO)
MBOs are another popular option for business owners seeking a seamless exit whilst also incentivising key employees. This strategy is particularly effective for owners looking to retire, and who have developed teams deeply familiar with the business and committed to its success.
A well-structured MBO allows the existing management team (which can include family members or existing shareholders taking over from retiring shareholders) to purchase the business, ensuring continuity in leadership, operations and, in certain cases, the succession of a family legacy.
Advantages:
- Vendors can retain a minority stake in the business.
- Motivates and incentivises the management team taking over the business by giving them an equity share that can be grown and sold for more favourable tax rates in the future.
- Retains business stability and relationships with employees, clients and suppliers.
- Offers a smoother transition, as the team already knows the business.
Challenges:
- The consideration can be payable on deferred terms over several years. This may not provide the immediate financial return of other strategies and requires confidence in the management team to continue running a profitable business to fund any deferred consideration.
Share buy-back
This is an effective option for companies with at least two shareholders, where one leaves the business and realises the value of their shares, while the remaining shareholder(s) continues running the business. With this route, the company can repurchase the shares from a departing shareholder itself.
Advantages:
- Provides a straightforward exit for the departing shareholder.
- Allows the proceeds to be paid out of existing surplus cash within the business itself, avoiding the need for the continuing shareholders to use personal funds.
Challenges:
- Trickier to undertake on deferred consideration terms, making it less flexible than other strategies.
- Certain conditions must be met for the departing shareholder to benefit from capital tax rates on their proceeds – including a minimum ownership period of five years.
- Requires sufficient distributable reserves within the company to fund the proceeds.
Third-party sale
A third-party sale involves selling all or some of the business to an external buyer, such as a competitor or private equity investor. This route does not require a full exit, and a partial exit can be used to de-risk or raise capital for the business.
Advantages:
- Often provides the highest potential sale value.
- Infuses capital and expertise into the business to ensure its continued growth.
- Allows for vendors to retain a stake in the business.
Challenges:
- Can be a much lengthier process than other strategies because of due diligence and negotiation process.
- May disrupt business operations during the sale process.
Liquidation
This is suitable for cases where selling or transitioning ownership of the business isn’t viable, so owners may choose to cease trading and close the business altogether.
Advantages:
- Provides a clear end to business operations.
- Allows shareholders to receive distributions at the lower rates of capital gains tax.
Challenges:
- Does not maximise the value of the business assets.
- Anti-avoidance provisions mean that the shareholders are restricted from carrying on the same or similar business for up to two years after receiving distributions at capital gains tax rates.
Tax planning
Regardless of the chosen strategy, preparation is key to achieving a successful outcome and early planning is essential to provide the seller with the optimum tax position. Contact our expert tax team for advice on the most efficient exit strategy, including possible pre-sale tax restructurings and how to structure consideration in the most tax-efficient way.
