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If you intend to purchase a business, you should be aware that how you structure the transaction can significantly impact your tax obligations. Therefore, you should consider limiting your tax liability when planning a business acquisition. Unfortunately, tax law can be complex to understand regarding business transactions. This article will give you an overview of the possible tax obligations you may face depending on how you go about structuring the transaction.
Kinds of Taxes
Taxation law can often be challenging to understand. Moreover, your tax liabilities will ultimately depend on the specifics of the transaction and your target business. For example, a business that owns a lot of land can entail a substantially different tax liability than a business with few land assets. Additionally, structuring your transaction as an asset or share purchase can also determine your tax liability.
To help you understand the different kinds of taxes and what you may be liable for, we will first look at the kinds of taxes that may arise in a business transaction.
Stamp Duty
Stamp duty is a tax payable on tradeable market instruments like shares in a company or partnership holdings. Moreover, stamp duty is only relevant when you execute the transaction in the UK. Additionally, it may be relevant when the securities are related to a business in the UK.
If you acquire shares in a UK company through a share transfer form, stamp duty may arise. Custom dictates that you, as the buyer, will pay the duty. Although, nothing is preventing the seller from paying it too.
If you pay less than £1,000 for the shares, stamp duty will not apply. Otherwise, it is generally 0.5% of the purchase price rounded to the nearest £5.
Stamp Duty Land Tax
You may be liable for stamp duty land tax (SDLT) if your purchase involves transferring the land title from the seller to the buyer.
If you are liable, you must pay within 30 days of the completion date. Furthermore, if you are acquiring commercial property, the rate is 5% when you pay £250,000 or more.
Other Taxes
You may come across references to other kinds of taxes, including:
- corporation tax;
- capital gains and income tax; and
- value-added taxes (VAT).
In most cases, these taxes will arise during the disposal of shares or a property. The seller will usually pay these.
Transaction Structure
The most significant factor that will likely affect your tax liability is how your structure your business transaction. The most common ways to structure a transaction are either an asset purchase or a share purchase.
Share Purchases
As the name suggests, a share purchase is where you acquire the shares in a company by paying the company’s shareholders. Notably, the only thing that will change in a share purchase is who owns the shares. Everything else stays as is, including the company’s ownership of all the property it holds for itself.
Asset Purchases
An asset purchase is where you choose to pay for one (or multiple) of a business’s assets. In this case, you will pay a sum of money to the business for the asset you choose. Additionally, the business will then transfer the title of each of these assets to you.
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Tax Liability Under a Share Purchase
Under a share purchase, the only thing in exchange is the shares in a company. Therefore, as a buyer in a share purchase, you will likely only have to pay stamp duty.
Ultimately, this form of transaction is typically a straightforward way to figure out how much tax you will owe. You will need to calculate 0.5% of the price for the shares you wish to purchase. For instance, if you pay £1m, you will owe £5,000.
However, a downside is that the company retains its tax identity. So, for example, if the company owes £5m in taxes, this will not change despite the shift in ownership of the company.
Tax Liability Under an Asset Purchase
Furthermore, your tax obligations will depend on the kinds of assets you acquire. For example, if you acquire any land, you will have to pay SDLT on the value of the land.
Excluding land, most assets do not impose a tax obligation on the buyer. Instead, the seller will usually have to account for them as a capital gains tax. However, this can change if you later decide to sell these assets yourself. In this case, the law tends to calculate the value against the initial price of the asset.
Tax Exemptions
Additionally, you may qualify for a number of tax:
- exemptions;
- losses; and
- treatments.
These exemptions will dictate the amount of tax you will have to pay. You may find it beneficial to consult an experienced team of advisors to ensure that you take advantage of any available tax exemptions. This might include an accountant or a solicitor.
Key Takeaways
Your tax obligations when purchasing a business will likely depend on how you structure the purchase as a buyer. For example, you can structure your purchase as an asset or share purchase. Under a share purchase, your tax liability will depend on the value of the shares. Usually, this will be 0.5% of the total price for the shares. In contrast, you will have to pay stamp duty land tax for the value of the land you acquire under an asset purchase.
If you need help understanding your tax obligations when buying a business, our experienced business lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Your tax liability depends on the assets you acquire. For example, you will have to pay stamp duty land tax if you acquire land.
If you pay more than £1,000 for shares in a company, you will have to pay 0.5% of this price. So as a general rule, it would be best to round this sum up to the nearest £5.
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