Tax planning for Management Buyouts – Maximising benefits, minimising liabilities
Released On 3rd May 2024
Management Buyouts (MBOs) present unique opportunities for business growth and transition.
In our experience, they can be a fantastic way of passing on your businesses to the next generation of management, who share the same passion and drive to see your organisation succeed.
Equally, for those looking to acquire a business they offer several advantages where a deal can be struck with an existing owner.
However, they also bring tax implications for all the parties involved that are worth serious consideration.
To maximise the financial benefits of an MBO, effective tax planning is a must – and the sooner that this can be considered the better.
Our expert team can help you navigate the MBO process and minimise any tax liabilities that come with it.
Understanding the tax implications of MBOs
An MBO can trigger various tax implications, including Inheritance Tax (IHT), Capital Gains Tax (CGT), and Corporation Tax.
We can assist in evaluating your MBO’s tax implications, ensuring you’re well-informed and prepared for every tax scenario that is applicable to your situation.
Capital Gains Tax and Business Asset Disposal Relief
One of the critical areas in MBO tax planning is CGT. Where an owner has made a gain on the sale or transfer of the business or shares relating to it, they will be required to pay CGT.
Sellers can potentially benefit from Business Asset Disposal Relief which can reduce the Capital Gains Tax rate to ten per cent on qualifying assets.
Contact us for a consultation to determine if you qualify for Business Asset Disposal Relief and how it can benefit your MBO.
Financing and structuring the MBO tax-efficiently
The structure of the MBO and the way it is financed can significantly impact tax liabilities. Whilst an initial cash payment is common, in some cases, it may be necessary or prudent to spread the purchase price over a number of years, as deferred payments, which can generally be funded from the ongoing trading profits of the business.
Our team can help analyse which structure offers the best tax outcome for your MBO, balancing the needs of buyers and sellers, while also guiding you through the various financing options, helping you understand the tax benefits and implications of each.
Planning for Inheritance Tax
IHT planning is another aspect to consider, especially in family-owned businesses undergoing an MBO. Gifting shares is an effective strategy for IHT planning in the context of an MBO. By transferring shares to family members or trusts, you may be able to reduce the value of your estate, lowering IHT liabilities.
With careful advice, it may be possible to use trusts to manage IHT obligations. Trusts allow you to place business assets or shares in a controlled environment, potentially reducing the IHT burden while maintaining some control over these assets.
Succession planning, life insurance policies, and regular reviews are also crucial in IHT planning. Effective succession planning ensures a smooth transition of business ownership while minimising tax liabilities.
Given that IHT laws and business valuations can change, it is important to regularly review and update your IHT strategies.
Our view on MBOs
MBOs offer an excellent opportunity for business owners and their management teams alike, but they require careful consideration and planning to maximise potential outcomes for everyone involved.
If you are approached by your management team with an offer or think that you would like to pass on your business using this approach, then it is important you give it careful consideration. We can assist in presenting this type of planning to your management team, if needed.
Given the complexity of tax laws and the significant financial stakes involved, seeking professional advice is paramount. Our experienced accountants and tax advisors can provide tailored advice, ensuring that your MBO is as tax-efficient as possible.
MBOs are a great option for business growth and succession, but the tax implications must be considered.
We can help you maximise the benefits of your MBO while minimising tax liabilities. Contact us today to discuss how we can support your MBO journey.
