Selling Your Company: Exploring Share Sales, MBOs & EOTs

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When selling a company, business owners have two primary options as to how the sale is structured. The vendor can either sell their shareholding in the company or sell the company’s underlying trade and assets. In this first part of our two-part explainer series, we explore the tax implications of structuring the transaction as a sale of shares, focusing on the position for both buyers and sellers, as well as alternative exit strategies such as management buyouts (MBOs), and employee ownership trusts (EOTs).

Contents

• Sales Between Unconnected Parties
• Management Buyouts (MBOs)
• Hive Downs
• Employee Ownership Trusts (EOTs)
• Conclusion

Sales Between Unconnected Parties

When a business owner sells their shares to an unconnected individual, this will normally trigger a chargeable disposal for capital gains tax (CGT).

Tax Consequences for the Seller

• Where the company is sold for cash consideration, the seller will calculate a chargeable gain or capital loss on the disposal of shares.
• If the seller makes a gain on disposal, they may consider making a Business Asset Disposal Relief (BADR) claim, reducing the CGT rate to 10% (rising to 14% from April 2025 and 18% from April 2026), provided the relevant conditions are met.
• For sales including an element of non-cash consideration, such as loan notes, shares, or other assets, the CGT treatment may vary. In some cases, gains may be held over or deferred until a later chargeable event, depending on the nature and mix of the consideration.
• Earn-outs—additional payments contingent on the satisfaction of a specified condition in the future—can also impact the timing of the CGT liability, depending on whether the amounts concerned are ascertainable or unascertainable.
• For the sake of simplicity, this article does not cover the detailed tax implications of non-cash or deferred consideration. However, sellers should carefully structure the transaction to optimise their tax position based on their individual circumstances.

Impact on the Target Company

• The company whose shares are being sold will likely continue trading with no interruption to its corporation tax accounting period.
• However, if the target company has carried-forward trade losses, the buyer should assess whether a major change in the nature or conduct of the company’s trade has occurred or is expected to occur within any five-year period that begins no more than three years before the change in ownership and includes the date of the change. In such cases, the carried-forward trade losses may be restricted under s.673 CTA 2010.
• Even if there is no major change in trade, additional restrictions may apply to carried-forward losses if there has been a major change in the business within the same five-year period for trade losses or within an eight-year period (beginning three years before the change in ownership) for all other losses.

Considerations for the Buyer

• The buyer is acquiring a company with ‘history’, meaning they inherit not only its existing assets but also its liabilities, tax history, and any potential risks associated with past operations. This could include outstanding debts, unresolved tax matters, legal disputes, and contractual obligations that remain in place post-sale.
• Given these risks, buyers should conduct thorough due diligence, reviewing financial statements, tax records, legal agreements, and compliance history to identify any hidden liabilities or risks before completing the transaction.
• The buyer will likely rely on representations made by the seller regarding stock values, fixed asset conditions, reported liabilities, and other key financial matters. To mitigate risk, the buyer should request warranties from the seller, providing legal recourse if any of these representations turn out to be untrue.
• Indemnities provide an added layer of protection, requiring the seller to compensate the buyer for specific unforeseen liabilities that may arise post-sale, such as undisclosed tax liabilities, employee disputes, or regulatory fines. Indemnities are crucial when buying a company with a complex operational history or significant legal and tax risks.
• As covered in Part 2 of this series, buyers should also consider the implications of purchasing shares as opposed to the underlying trade and assets. Unlike an asset purchase, where only selected assets and liabilities are transferred, a share purchase means taking over the entire company, including its past dealings and potential liabilities.

Management Buyouts (MBOs)

A management buyout (MBO) occurs when a company’s existing management team agree to purchase the shares or the trade and assets of the business to become shareholder-directors. The tax implications largely mirror those already covered for share sales versus asset sales, with a few additional considerations specific to MBOs.

One of the key decisions for the management team is whether to acquire:

• The shares of the company, thereby inheriting its history, contracts, and liabilities.
• The trade and assets of the target company via a newly established entity.

Additional Tax Considerations in an MBO

1. Acquiring Shares/Assets at Below Market Value:

If the management team purchases either the company’s shares or the underlying trade and assets for less than their market value, HMRC will likely view the difference as employment income, with a charge raised based on the difference between the market value of the shares/assets and the price paid.

This is because the managers, as employees/officers, are deemed to have received a discount by virtue of their employment. Furthermore, the acquired shares may be treated as readily convertible assets, meaning that tax and NICs must be charged and accounted for via the company’s PAYE scheme.

2. Impact on CGT:

If employment income arises due to the purchase at undervalue, the amount taxed as income is added to the CGT base cost of the shares or assets, reducing the taxable gain on a future disposal.

3. Buyout Financing – Loan Interest Relief:

MBOs are often financed through external borrowing. Where the management team takes out personal loans to fund the purchase, interest paid on the loan may qualify for income tax relief under the rules for deductible payments.

Hive Downs

A hive down is a structured approach to acquiring a business while ensuring the buyer takes over a ‘clean company’, free from historical liabilities. Unlike a direct trade and asset purchase, this method allows the transaction to be structured as a share acquisition, which can be advantageous in certain circumstances.

Typically, the process begins with the seller incorporating a new company (Newco), to which the existing company (A Ltd) transfers its trade and assets. Provided the seller retains at least 75% ownership in both companies at the point of transfer, the ‘succession’ rules may then apply and any trade losses and capital allowance pools can move with the business.

Once this restructuring exercise is complete, the buyer then acquires shares in Newco, securing ownership of a newly formed entity without inheriting the liabilities or tax history of the original company.

From a tax perspective, a hive down can offer several advantages. If the succession of trade rules apply, trading losses and capital allowance pools can transfer to Newco, preserving valuable tax reliefs. Additionally, if the Substantial Shareholding Exemption (SSE) conditions are met, the sale of Newco’s shares may be exempt from Corporation Tax on chargeable gains in the hands of the transferor. Furthermore, the hive down of a trade will usually qualify as a transfer of a going concern (TOGC) and therefore be outside the scope of VAT.

A hive down can be an effective route for buyers looking to acquire a business while avoiding the risks associated with its prior operations. However, careful structuring is essential to ensure that tax reliefs apply and to mitigate potential complications arising from loss transfers, cross-tax treatment, and regulatory considerations.

Employee Ownership Trusts (EOTs)

Selling a company is rarely straightforward. Finding a suitable buyer, agreeing on a fair valuation, and ensuring continuity for employees can make the process complex and time-consuming. For business owners looking for an alternative to a traditional sale, a sale to an Employee Ownership Trust (EOT) offers an increasingly popular tax-efficient solution.

An EOT is a form of trust set up to hold shares in a company on behalf of its employees, effectively transitioning indirect ownership to the workforce. Unlike a direct sale to a third party, this structure allows business owners to sell their company at full market value while ensuring stability and long-term continuity. The transition is typically overseen by a Board of Trustees, which includes representatives from the company’s employees, giving the workforce a vested interest in the business’s future success.

From a tax perspective, an EOT offers significant incentives:

1. CGT Relief – When an EOT acquires a controlling interest (more than 50%) in a company, shareholders who sell their shares as part of this transaction can claim CGT relief. This means the disposal is treated as occurring at no gain and no loss, which is particularly valuable for those who do not qualify for Business Asset Disposal Relief (BADR).
2. Income Tax-Free Employee Bonuses – Companies controlled by an EOT can pay tax-free bonuses of up to £3,600 per employee each year. However, National Insurance Contributions (NICs) still apply for both employees and employers.
3. Corporation Tax Deduction – The company can claim a corporation tax deduction for qualifying bonus payments made to employees under the EOT structure, reducing its taxable profits.
4. Inheritance Tax (IHT) Exemption – Transfers of shares to an EOT, whether by gift or sale at undervalue, are not subject to an inheritance tax charge. Additionally, the trust itself is generally not subject to periodic IHT charges, such as the 10-year IHT charge, as well as IHT exit charges.

To qualify for these tax benefits, the structure must meet several conditions. For example, the company must be a trading business or the parent of a trading group, and the trust must be set up for the benefit of all eligible employees on equal terms. Former owners can retain a minority shareholding and remain in management roles, but the trust must maintain at least a controlling interest (more than 50%) in the company going forward.

Funding the EOT typically involves a deferred payment structure, where the company generates profits over time to repay the selling shareholders. Alternatively, the share purchase could be funded by third-party borrowing (e.g. a bank loan), surplus cash within the company, or any combination of the above.

For business owners seeking a structured exit while safeguarding their company’s culture and workforce, an EOT provides an appealing alternative to a conventional sale. By providing indirect ownership to the employees, it fosters engagement, enhances productivity, and helps ensure a smooth succession—all while offering compelling tax advantages.

Conclusion

Selling a company is a significant decision that requires careful consideration of both commercial and financial factors, as well as any associated tax implications. While a traditional share sale to an unconnected buyer is the most common approach, alternative exit strategies such as management buyouts (MBOs), hive-downs, and employee ownership trusts (EOTs) offer business owners more flexibility, particularly when succession planning or tax efficiency is a priority.

Each method comes with distinct advantages and potential challenges. A management buyout allows an existing leadership team to take over the business, ensuring continuity but requiring careful structuring to avoid unintended tax consequences. A hive-down provides a way to sell a “clean” company, free from historical liabilities. Meanwhile, an EOT offers a tax-efficient exit that aligns the long-term interests of employees with business success, making it an attractive choice for those seeking a legacy-driven transition.

The right approach depends on the seller’s objectives, the company’s financial position, and the preferences of potential buyers. Business owners should carefully evaluate their options and seek professional advice to structure the sale in a way that maximises value, minimises tax exposure, and ensures a smooth transition for the business and its stakeholders.

Get in Touch

Every business sale is different. If you're exploring exit options, we can help identify the best structure for your situation. Contact us today to arrange a free initial consultation.

This article provides general information and should not be considered professional advice. It reflects legislation and practices at the time of writing, which may change. Individual circumstances vary, so please consult us before taking any action. We accept no responsibility for financial loss arising from actions taken without our written advice.

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AUTHOR

Liam O'Riordan

As Principal at Veritas ATS, I help start-ups, owner-managed businesses, and individuals simplify accounting and tax, providing clear, practical solutions tailored to their needs.

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