A business acquisition can be structured as either a purchase of a company’s shares or a purchase of a company’s trade and assets. As a general rule, a buyer will often prefer to acquire assets such as trading stock and plant and machinery on which tax relief can be claimed. Tax deductions may also be available on some intangible assets.
A key advantage of a trade and asset purchase is that the purchaser is less likely to be exposed to inheriting historical liabilities in the target company on/post acquisition. By buying the assets, the purchaser avoids responsibility for past actions of the company and other contingent liabilities, which remain with the seller. However, one of the key disadvantages is that a trade and asset purchase can be complex from a legal and administrative perspective, including the transfer of licences and approvals and customer/supplier contracts which the business depends upon. Tax losses are also likely to be forfeited.
Although trade and asset acquisitions may be more attractive to purchasers, asset acquisitions can create issues for sellers due to the double tax charge they will often suffer. An asset sale will generally result in taxable income arising to the vendor company which would be subject to corporation tax at 19% (25% from 1 April 2023 (subject to a lower rate for smaller companies)). Where sellers subsequently extract the balance of the proceeds further tax liabilities are likely to be suffered. As such, the extraction of proceeds following an asset sale can often prove problematic itself as sellers are likely to suffer high income tax rates where dividends are received or incur additional costs in liquidating the company to extract the proceeds in capital form. Sellers will, therefore, usually have a strong preference for a share sale, particularly where the shareholders are expecting to benefit from reduced capital gains tax rates under the Business Asset Disposal Relief regime.
In addition, a purchase of shares is generally deemed to be ‘cleaner’ than an asset purchase, although it does carry the risk of acquiring undisclosed and/or contingent liabilities. As a result, additional adviser costs may be incurred in ensuring that adequate warranties and indemnities are in place to reduce the purchaser’s financial exposure.
A summary of the differences between tax treatment of a share purchase and a trade and asset purchase is set out in the table below. This assumes that the purchase will be from an unrelated third party.
Summary of tax implications – Share v asset purchase
| Tax item | Share purchase | Trade and asset purchase |
| Tangible and intangible assets | Tax relief will continue to be claimed based on carried forward tax written down values.
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Capital allowances on qualifying assets are generally based on the price paid for the assets.
Structure and buildings allowances may be claimed where the qualifying expenditure is incurred post October 2018 and has a tax written down value carried forward on acquisition.
Allowances on fixtures within buildings can be shared between the buyer and seller by agreement.
Tax amortisation should be available for intangible assets (subject to various conditions).
From April 2019, tax relief may also be available for goodwill, but such deductions are subject to stringent conditions.
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| Trading stock | Tax deductions will continue to be available based on the cost of the stock when it was purchased.
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Purchasers can record the stock at cost and should receive a tax deduction for the price paid. |
| Tax losses | Tax losses remain available subject to various anti avoidance provisions. Therefore, where a company is loss making, and the purchaser considers that there is value in the tax losses as these may be able to be used in the future, a share sale is often preferred. | All tax losses are forfeited and are not available to the purchasing entity. |
| Degrouping charges | Degrouping charges may arise in respect of chargeable assets and intangibles transferred within the vendor group within the last six years. However the UK Substantial Shareholdings Exemption often applies to exempt chargeable degrouping liabilities or shelter intangible degrouping charges. | No degrouping charges. However, a chargeable gain or loss may arise on the sale of capital assets (e.g. property) and will be subject to corporation tax. |
| Stamp duty | Purchasers suffer 0.5% stamp duty on share acquisitions. | Stamp duty land tax up to 5% may be due on commercial land and property purchases. |
| Historical liabilities | Secondary/ historical tax liabilities may be inherited. Adequate legal protection should be sought. | Not applicable. |
Conclusion
As set out above there are tax advantages and disadvantages to both a trade and asset or share purchase and the most beneficial acquisition structure is not always clear-cut. Ultimately, the best acquisition route will depend on the commercial objectives of the purchaser and their intentions regarding the continuation of the existing trade post transaction.
The structure of the deal will also depend on the negotiating positions of the parties and the tax advice provided by the parties’ respective advisers. It is often a balancing act, and it is important to decide on the desired structure at an early stage so that the transaction progresses as smoothly as possible.
If you require advice on any of the issues raised in this note, please contact us and we will be happy to advise you.
As always, we hope this article is helpful, but it should not be taken as constituting tax advice, and we accept no responsibility for any action taken or not taken as a result of this factsheet.
