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Should You Buy the Assets or the Shares?

Newsletter issue - February 07.

When purchasing a business run through a Limited Company, a decision has to be made as to whether it is the assets and goodwill within the company that is being bought or whether it is better to purchase the shares of the company. In many situations it is the case that the buyer wants the assets but that the vendor wants to sell the shares. However, it has to be one or the other and here are some of the key points to note...

  1. If you purchase shares you are taking over the company, warts and all. Any liabilities that later come out of the woodwork will be your responsibility. Warranties in the sale contract can help protect you but it means a more complicated sale contract and higher legal fees and relies on you being able to reclaim from the vendor, who by that time may have disappeared overseas in retirement.
  2. By buying the assets you can claim capital allowances on the actual amounts you pay for plant and machinery, not on the reduced written down value they are at in the company tax computations.
  3. By purchasing the shares you are purchasing the goodwill within the company and so when you subsequently come to sell the goodwill of the company yourself, you are effectively taking over the tax on the gain that occurred before you even bought the company.
  4. If you are trading through a limited company and purchase intangible assets such as goodwill, you can claim tax write-downs on the purchase of those assets. This is not the case if you buy the shares.
  5. Buying assets personally allows you to build up capital gains and only pay 10% CGT by using business assets taper relief. By buying the shares, the gains accrued are taxed within the company and you then have a tax problem in getting the funds out of the company and into your personal hands.
  6. If the company has accumulated tax losses you will be able to use them to offset against future profits only if you purchase the shares.
  7. If there is a property in the company, buying shares will reduce the stamp duty land tax payable from as much as 4% on the property to 0.5% stamp duty on the shares.

As one side in the transaction will often gain from a particular sale structure, you should make sure you know what you want and what it means to the other side to help in the purchase and sale negotiations. For a full tax appraisal considering the above and other issues on any business sale or purchase please contact us.