In the Government's annual Budget (delivered on 17 April) a number
of measures have been proposed (which will become law unless
something major and unforeseen happens before the end of July)
which may have an effect on whether an acquisition is structured as
an acquisition of shares in a company (the target) or as an
acquisition of the business of the target.
How an acquisition is structured has always
depended upon an assessment of the tax and commercial issues for
both seller and buyer and, through negotiation, striking a balance
between their respective interests. Post-Budget this will continue
to be the case but the friction between the wishes of the seller
and those of the buyer may now be even more marked.
Historically sellers have preferred to sell shares
in the target and the proposals in the Budget make this even more
likely. With effect from 1 April 2002 where a UK company which has
a "substantial shareholding" in the target (which is a trading
company or group) the seller will be exempt from tax on the
sale.
On the other hand, individuals are not eligible for
the exemption but will be eligible for capital gains tax "taper
relief". Where the shares in the target have been "business assets"
throughout the seller's period of ownership the sale of the shares
after 6 April 2002 will give rise to an effective rate of tax of
only 10 per cent where the shares have been held for at least two
years. These reliefs provide a strong incentive for the seller to
sell shares rather than effect a sale of the underlying assets
(which would attract tax at a higher rate).
A share sale will often trigger a capital gains
exit charge in the target. This arises where an asset has been
transferred intra-group to the target (for tax purposes at the
transferor's base cost in the asset) and within six years of the
transfer the target leaves the group. Most share sales are
structured on the basis that the seller is responsible for meeting
any such tax liability. In some cases this may result in the seller
preferring to structure the transaction as a business sale because
the seller may be able to shelter the gain arising on a direct sale
of the asset that has been transferred intra-group whereas the
seller would be unable to shelter it if the gain arises in the form
of an exit charge. With effect from 1 April 2002 where an exit
charge arises in the target the seller (or another company in the
seller's group) and the target may elect that the tax liability is
treated as having arisen in the seller or another company within
the seller's group. This will give the seller the same flexibility
to shelter the gain (for example, with capital losses) arising on
the exit of the target from the group as a gain arising on a direct
sale of the assets. It thus removes a possible disincentive for the
seller to sell shares.
Buyers often prefer to acquire assets.
Commercially, liabilities will only pass if expressly assumed and
it is often easier in a business sale for the buyer to ensure that
he only takes (and pays for) the assets that he wants. On a
business acquisition the buyer will be entitled to claim capital
allowances on eligible assets (e.g. plant and machinery) by
reference to what he pays (correspondingly, the seller will suffer
a claw back of allowances where the agreed price exceeds the tax
written down value). In addition the buyer will obtain a step up in
the base cost of the assets whereas on a share acquisition the
capital gains base cost of the assets held by the target will
remain at their historic values. Both of these considerations
provide the buyer with an incentive to acquire assets. This
preference is reinforced by two new measures announced in the
Budget.
First, an exemption from stamp duty on the transfer
of goodwill is introduced and it is intended that towards the end
of next year stamp duty will be payable only on real estate (at the
rate of 4 per cent for sales in excess of £500,000) and shares (0.5
per cent). The disincentive to buyers of acquiring assets at a rate
of duty of 4 per cent as against shares at a rate of duty of only
0.5 per cent is therefore eliminated except where the value of real
estate in the target is substantial.
Second, a new regime for the taxation of intangible
assets is also introduced and is designed to align the tax
treatment of intellectual property and goodwill with the accounting
treatment. It will apply to intellectual property and goodwill
acquired or created before 1 April 2002. Tax relief will normally
be available for the amortisation of intellectual property and
goodwill in line with the accounts treatment. For accounts purposes
intellectual property and goodwill would normally be written off
over its useful economic life; this would normally not exceed 20
years. Where it is likely to have an indefinite useful economic
life no amortisation is chargeable for accounts purposes but an
election may be made for a 4 per cent annual write off for tax
purposes. On a purchase of shares a buyer would not obtain the
benefit of the new regime whereas a direct acquisition of assets
from a party not associated with the buyer will be taxed under the
new regime. This will therefore provide an incentive for the buyer
to acquire assets rather than shares.
It seems that as never before there will be scope
for real differences of approach between sellers and buyers. The
balance of negotiating power will never have been more important.
In competitive tenders the value of bids for assets may be
significantly higher than those for shares but the seller will have
to consider his tax position carefully. There has been some call
for the substantial shareholdings exemption to be extended to cover
asset sales but whether the Government will listen remains to be
seen.
For further information please contact:
Richard Croker
Phone: +44 (0)20 7367 2149
Email: richard.croker@cms-cmck.com
Simon Meredith
Phone: +44 (0)20 7367 2959
Email: simon.meredith@cms-cmck.com
Mike Boutell
Phone: +44 (0)20 7367 2218
Email: michael.boutell@cms-cmck.com