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, who share the same passions 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.

Why not reach out to us today to find out how we can help you? Speak to Us

Understanding the tax implications of MBOs

An MBO can trigger various tax implications, including Inheritance Tax (IHT), Capital Gains Tax (CGT), and Corporation Tax.

Our firm 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 Capital Gains Tax (CGT). Where an owner has made a profit/gain on the sale or transfer of the business, or shares relating to it, they will be required to pay CGT, unless the gains are below the annual exemption threshold (currently £6,000, falling to £3,000 from 6 April 2024).

Sellers can potentially benefit from Business Asset Disposal Relief, a tax relief which can reduce the Capital Gains Tax rate to just 10 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. In some cases, it may be necessary or prudent to space out the transfer of the business through the regular disposal of the original owner’s shares over time.

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.

Utilising pensions in funding MBOs

Pensions can sometimes be used to fund MBOs in a tax-efficient manner.

Specifically, Self-Invested Personal Pensions (SIPPs) and Small Self-Administered Schemes (SSASs) are often utilised in this context.

These pension schemes can invest in a wide range of assets, including shares of private companies, which can be instrumental in an MBO scenario.

For instance, a SIPP or SSAS can purchase shares in the company that’s subject to the MBO, providing the necessary funds for the buy-out. This approach not only aids in financing the MBO but also brings significant tax advantages.

Planning for Inheritance Tax (IHT).

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 can reduce the value of your estate, potentially lowering IHT liabilities.

Additionally, setting up trusts could further 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. Life insurance policies, particularly when written in trust, can cover potential IHT liabilities without adding to your estate’s value.

Given that IHT laws and business valuations can change, it is important to regularly review and update your IHT strategies.

Our firm offers ongoing services to ensure your IHT planning remains effective and compliant with current legislation, helping you navigate these complex requirements with ease. Contact us today for further guidance.

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.

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 tax implications of an MBO 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.

This blog is for guidance only, professional advice should be obtained before acting on any information contained herein. The information was correct at the time of publishing 18 March 2024.

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