24 June 2024

Management Buyout: Key Tax Considerations for Management

If you were given an amazing opportunity to buy shares in the company you work for through a management buyout (MBO), would you understand all the tax implications?

You could be taking full control or owning a significant stake, allowing you to benefit directly from the company’s future success – but what does this mean for you? While it’s common to seek corporate finance advice, it’s equally important for you to understand the tax implications.

Let’s explore key tax considerations to help you make informed decisions and ensure a smooth transition.

The basics of a management buyout

A management buyout involves you and your team acquiring the business you operate from its current owners. This can be an attractive option for both parties: the owners secure a buyer already familiar with the business, and you get the opportunity to own and grow the business you are passionate about.

Key tax considerations

  1. Ensuring capital gains tax treatment for vendors

As a vendor, you want any gains from the sale to be taxed at Capital Gains Tax (CGT) rates of 10% or 20%, depending on your tax position and eligibility for Business Asset Disposal Relief. However, HMRC might classify the funds as dividend income, which can be taxed up to 39.35%. It’s advisable to seek advance clearance from HMRC to mitigate this risk to ensure the gains are taxed under CGT rules.

  1. Avoiding CGT for continuing shareholders

In many MBOs, you might exchange your current shares for shares in a new company. If the transaction is done for legitimate business reasons, you may be able to defer CGT on this exchange. Again, it’s recommended to get advance clearance from HMRC to ensure this treatment and avoid unexpected tax liabilities.

  1. Avoiding employment tax charges

If you receive more than the market value for your shares, or if the value is transferred to someone else, it can lead to employment tax charges. This could mean paying up to 45% in employment income tax, plus 2% in National Insurance Contributions (NIC) for you and 13.8% for the employer. 

To avoid this, it’s recommended to get a professional valuation of the shares. Additionally, reviewing how the original shares were acquired is important to determine if any gains are subject to employment income tax and NIC.

  1. Managing the timing of tax payments

Different forms of payment in an MBO have different tax consequences. Sometimes, it might be helpful to choose to pay taxes sooner at lower rates. However, it’s important to get professional advice before doing this to make sure it’s beneficial and that it complies with tax laws.

  1. Tax relief for new investors

As part of the incoming management team, you should explore potential income tax relief on interest from borrowings and consider whether you qualify for Venture Capital Relief, which can provide CGT exemption on the future sale of shares in the new company.

  1. Stamp Duty

Stamp Duty may apply at a rate of 0.5% on the acquisition of shares in the new company. While this may seem minor, mitigation strategies may be available to help reduce this cost. As accountants, we recommend factoring this into your overall financial planning for the buyout.

Ensure a smooth transition

A management buyout can be a valuable opportunity, but understanding the tax implications is crucial. With careful planning and expert advice, you can structure the buyout efficiently, making the transition smoother and achieving better financial results.

Need help? Get in touch today to talk to a tax specialist.

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