A client of ours operated in the publishing business.
The owner of that company sold out to a large group in 2013 for a price which included some cash up front and some shares in the acquiring group, the latter dependent upon the performance of the acquired business in the first year following the deal. The total actual and potential consideration was beyond the remainder of the owner’s Entrepreneur’s Relief allowance as a result of a disposal of a related business back in 2010.
The owner faced two particular tax challenges in the transaction, being;
(1) How to access more Entrepreneur’s Relief; and
(2) How to deal with the “earn-out” shares for the purposes of taxation, at the date of the transaction. The latter challenge involved whether to crystallise a gain on those new shares at the date of the deal or whether to play for a rollover of the attributable gain to avoid early CGT at potentially high rates.
Ultimately, through careful assessment of the technical possibilities supported by skilful negotiation with the buying group, we were able to secure for this owner;
i) a one year option period on a tranche of the disposal, for the owner’s husband, providing access to his own, undiminished, Entrepreneur’s Relief limit; and
ii) an agreement to resolve the earn-out position within 12 months to enable the former owner to crystallise her position as early as possible within the same tax year and determine her best strategy (including whether to sell on her consideration shares in the market in the same tax year), between rolling over the original gain or taxing that gain in full at the outset.
Managing Entrepreneur’s Relief in situations of high value disposals and/or earn-out situations requires technical know-how, experience, the ability to negotiate and, of course, some flexibility on the part of all parties involved, but, with rates of CGT at either 10% (ER) or 28% (otherwise), the impact on the net cash achieved is always significant.