Taxation

Asset Purchases - Tax Issues

Buyer

Stamp Duty and Stamp Duty Land Tax (SDLT)

Stamp duty on the acquisition of assets (with the exception of shares and marketable securities) was abolished by the Finance Act 2003. Therefore, depending on the nature of the assets of the target, there may be no stamp duty payable by the buyer.

There is, however, SDLT levied on UK land and buildings, up to a maximum of 4% on property worth over £500,000; 3% between £250,000 and £500,000; 1% below (subject to a zero rate bound and various exempt areas). The buyer must take this into consideration whilst considering the structure of the acquisition, as there is only a 0.5% stamp duty cost on the purchase of shares.

Corporation Tax Regime for Intangible Assets

If the buyer is a company which pays UK corporation tax, it should be entitled to tax relief for accounting amortisation of the price paid for goodwill, intellectual property, and other intangible fixed assets, provided that it buys them from an unrelated party.

Capital Allowances

The buyer will be entitled to capital allowances for qualifying expenditure on plant and machinery at 25% per annum on a reducing balance basis, or 6% per annum for assets with and expected useful life of 25 years. Higher first year rates may apply for small and medium sized companies or for IT expenditure.

Roll-over Relief on chargeable gains

If qualifying assets are acquired, chargeable gains on other asset disposals of qualifying assets within the previous 3 years, or which are expected to happen within the next year, may be deferred by the buyer, or other members of the buyer's group, by way of roll-over relief, until the sale of the replacement assets.

Higher Base Cost

The buyer will obtain a market value base cost in the acquired assets. The profit on a subsequent sale of such assets should be calculated only by reference to the increase in value from the date of the business acquisition. In contrast, on a share acquisition the assets remain owned by the target which may have a historically low base cost.

Stock

An immediate tax deduction may be available to the buyer for the amount paid for any stock.

Tax Liabilities

Generally, the buyer will not take on the tax liabilities of the seller.

Seller

Double Tax Charge

The seller may suffer a double tax charge on the disposal of a business. Not only might the seller company be liable for corporation tax arising from the sale, but the shareholders may also incur tax liabilities. In the case of individual shareholders, if the seller company pays a dividend out of sale profits, these will be subject to income tax. If the seller company is liquidated after the disposal, and shareholders (individual or corporate) receive distributions, these will amount to a disposal of their shares for capital gains tax purposes.

Roll-over Relief on income gains

The corporation tax regime for intangible assets also contains roll-over provisions, allowing relief if the proceeds from the sale of the qualifying intangible assets are reinvested in such assets.

Share Purchases - Tax Issues

Buyer

Stamp Duty

The buyer will be liable to pay ad valorem stamp duty on the shares, at a rate of 0.5%. As stated above, this should be compared with the SDLT rates that would be payable on property if the acquisition were to be structured as an asset purchase.

Trading Losses

The target may be able to carry forward trading losses from the period before the sale and set these against future profits, which is not the case in an asset sale to an unrelated party.

VAT

A share purchase is VAT exempt, as opposed to an asset sale, which may be subject to VAT if it is not a transfer of a going concern.

Seller

Capital Gains Tax

If the seller is an individual he/she will pay capital gains tax on the gain arising from the disposal of shares. This is charged at the marginal rate at which the individual pays income tax.

Corporation Tax

A corporate seller will pay corporation tax on any chargeable gain which arises from the sale of the shares at the applicable rate of corporation tax for that company's chargeable profits.

Taper Relief

For individual sellers who are UK residents, indexation relief is available for shares held for periods up to April 1998, and for periods thereafter, taper relief is available. If the shares qualify as "business assets" and have been held for at least 2 years, enhanced relief is available, so that capital gains tax is only levied at 10%.

Substantial Shareholdings Exemption ("SSE")

If the seller is a company, a capital gain on the sale of the shares will be tax exempt if the SSE applies. This applies where, throughout a continuous 12 month period beginning not more than 2 years before the sale, the company selling the shares held a substantial shareholding (broadly at least a 10% interest). Certain conditions must be satisfied, but, providing these are satisfied, the exemption will be automatic.

Roll-over Relief

If the SSE does not apply, the seller will be able to defer the payment of capital gains tax if the consideration for the sale of shares takes paper form (e.g. shares or loan notes in the buyer).

Main Tax Implications of Purchasing Assets or Shares