Not tax advice. A list of the questions worth taking to your independent tax adviser before you sign anything binding. The specific facts of your practice, your other affairs, your pension position, and your timing all matter, and only your own adviser, looking at your full picture, can answer them properly. The point of this list is to make the first meeting with your adviser productive rather than exploratory.
The questions are grouped under four themes: pre-sale planning, asset versus share sale, pension and personal tax, and practical mechanics. Treat each one as a starting point for the conversation, not an answer.
All tax content here, and any answers your adviser gives, are subject to your individual circumstances. We recommend you take independent advice and that you do so before signing the Heads of Terms, not after.
Contents
- Why this conversation needs to happen early
- Pre-sale planning
- Asset sale versus share sale
- Pension and personal tax
- Practical mechanics
- The brief to your adviser
- What to do today
Why this conversation needs to happen early
The structural tax decisions on a practice sale, asset versus share, pension contribution windows, the timing across tax-year boundaries, are decisions that have to be made before the SPA is drafted, sometimes before the Heads of Terms is signed. By the time the SPA is in late draft, most of the levers have already been set. Sellers who go to their tax adviser in week ten of a twelve-week deal often discover they could have saved a meaningful amount of tax if they had made one or two structural choices three months earlier. The conversation is best had before any binding negotiation starts.
Bring this list to the first meeting with your adviser, alongside your last three years of accounts, your pension fund valuations, and a one-page summary of the proposed deal structure. The first meeting is then a working conversation, not a fact-finding one.
Pre-sale planning
1. Am I eligible for Business Asset Disposal Relief, and how much of my lifetime allowance have I already used?
BADR (formerly Entrepreneurs' Relief) reduces the capital gains tax rate on qualifying disposals up to a lifetime limit. Eligibility depends on factors including the form of the practice, your shareholding or partnership interest, the period of ownership, and whether you are an officer or employee. The lifetime limit is a moving target politically. Your adviser needs to confirm both that you qualify and how much of the limit you have available, factoring in any prior disposals.
2. If I am close to but under the lifetime limit, is it worth structuring the sale to consume only what is available?
If your remaining BADR allowance is less than the headline gain, your adviser may suggest splitting the consideration so that the BADR-relieved portion fits within the available limit, with the balance taxed at the ordinary CGT rate. This is a structural decision that needs to be settled before the SPA defines the consideration components.
3. Is there any value in distributing reserves, paying down a director's loan account, or taking final dividends in the year before sale?
If the practice is incorporated, the way reserves are extracted before sale affects the price the buyer is paying for. Pulling reserves out before completion changes the share price and the gain. Your adviser will model the tradeoff between reducing the gain (and the BADR consumption) versus the income tax cost of extracting the reserves through dividends or salary.
4. Are there any pre-sale restructuring steps that would simplify the deal or reduce the tax cost?
Examples include collapsing a service company into the trading entity, demerging a property-holding company before sale so the buyer is buying the trade only, or rationalising group structures. These are not always worth doing, but if they are worth doing they need to be done at least twelve months before completion to avoid HMRC's anti-avoidance scrutiny. Ask your adviser whether any of these apply.
Asset sale versus share sale
5. Is my practice a partnership, a sole trade, or a limited company, and what does that mean for whether the deal is structured as an asset sale or a share sale?
The form of the practice constrains the form of the deal. Partnerships and sole trades sell assets (the goodwill, the WIP, sometimes the staff via TUPE). Limited companies can sell either assets or shares. Each route has different tax consequences, different stamp duty implications, different VAT considerations, and different risk profiles for the buyer. Your adviser needs to confirm which forms are available to you and which they recommend.
6. If a share sale is available, what is the tax cost difference between share sale and asset sale, on both sides?
Buyers prefer asset sales because they can step up the tax base of the assets and write down the goodwill against future profits (subject to the post-2015 corporate goodwill rules). Sellers usually prefer share sales because the gain is on the shares (one CGT computation, BADR available) rather than on the underlying assets (multiple computations, possible income-element on goodwill, possible balancing charges on plant and machinery). The difference can be material. Your adviser will model both.
7. If the deal is asset sale, how is the consideration apportioned across goodwill, work in progress, fixed assets, and any other transferring items?
The apportionment in the SPA matters because each component is taxed differently. Goodwill is subject to CGT (with BADR if eligible). WIP may be taxed as income. Fixed assets may trigger balancing charges or balancing allowances against the capital allowances pool. Get your adviser to review the proposed apportionment in the SPA before it is signed; sometimes a small reallocation between components produces a meaningful tax saving.
8. How is goodwill taxed in my hands, and does the answer depend on whether the practice was incorporated and when?
The taxation of goodwill on disposal depends on the structure of the practice and on its history. If the practice was incorporated at some point with goodwill recognised at that incorporation, there may be base-cost considerations. If goodwill was created entirely within a partnership or sole trade, the position is different. Your adviser needs the history.
Pension and personal tax
9. What is the maximum pension contribution I can make in the two tax years before completion, using carry-forward of unused annual allowances?
One of the most reliably tax-efficient steps in the run-up to a practice sale is making large pension contributions out of pre-tax profits. Carry-forward allows unused annual allowance from up to three previous years to be brought into the current year. The mechanics depend on your historical contributions, the trading entity's profits, and the corporate or self-employed structure. Your adviser will calculate the maximum and the cashflow implications.
10. Are pension contributions deductible against trading profits, and does the timing matter for the corporation tax computation in the year of sale?
Employer pension contributions are usually deductible against trading profits, subject to the wholly-and-exclusively test and the spreading rules for very large contributions. The timing affects which corporation tax accounting period absorbs the deduction, which affects the cash position of the entity at completion, which affects the price. This is a worth-mapping conversation.
11. What is my income tax position in the year of sale, and is there value in deferring or accelerating any other income or gain into or out of that year?
The year of completion typically has unusual income or gain in it. Other personal-tax events (other capital gains, dividends from other sources, exit-stage drawings from the practice) interact with the sale in ways that can be optimised. Your adviser will review the personal tax computation for the year and the year before.
12. If I am married or in a civil partnership, is there any value in interspousal transfer of assets before sale?
Interspousal transfers between UK-resident married couples or civil partners are no-gain-no-loss for CGT, and may allow the use of two BADR allowances if both spouses qualify. Eligibility depends on whether the transferee meets the BADR conditions, which usually requires more than a transfer immediately before sale. Your adviser will assess feasibility and timing.
Practical mechanics
13. How is work in progress treated at completion, and who pays tax on it?
Work in progress is partly-completed client work that has not yet been billed at the date of completion. The accounting treatment, the tax treatment, and the SPA mechanics for splitting the eventual billing between buyer and seller all interact. Get the adviser to walk through a worked example based on your typical WIP balance.
14. What happens to dilapidations on the office lease, and is there a deduction available against the year-of-sale profits?
If you are leaving the office at completion or shortly after, dilapidations may be payable to the landlord. Whether the dilapidations expense is deductible against trading profits, and in which accounting period, depends on the lease terms and the timing of the obligation. Your adviser will review the lease.
15. Does the practice need to deregister for VAT on completion, and if so, what are the mechanics?
If the practice is a VAT-registered partnership or sole trade and the buyer is taking on the trade as a TOGC (Transfer of a Going Concern), VAT-on-the-deal is usually not due, but the deregistration mechanics still need to be handled. If part of the trade is being sold and part retained, the position is more complex. Your adviser will confirm.
16. How is the timing of completion across the tax-year boundary handled, and is there value in shifting completion by a few weeks?
A completion date in late March versus early April can shift the gain into a different tax year, with implications for personal allowances, other income in each year, and (occasionally) for known tax-rate changes. The buyer often has flexibility on completion timing of two to four weeks. Worth raising with your adviser before exclusivity.
17. How is a director's loan account handled at completion?
If the practice is incorporated and you have a director's loan account (whether you owe the company or the company owes you), the SPA must address how it is settled. A loan account owing from you must be cleared (commonly by deduction from completion proceeds). A loan account owing to you can be repaid at completion or rolled into deferred consideration. Each treatment has different tax effects.
18. If the practice owns or has an interest in property, how is that treated at sale?
Practice-owned property (the office freehold, for example) is sometimes sold to the buyer with the practice, sometimes retained by the seller and leased to the buyer, sometimes demerged before sale. The SDLT position, the CGT position on the property, and the rental-income position post-sale all need separate attention. Your adviser will recommend a route.
19. What is the tax treatment of any continuing professional fees I receive from the buyer post-completion?
If you continue to provide consultancy services to the buyer after completion (during the TSA period or beyond), the fees are typically taxable as income in your hands. The structure of the consultancy contract affects whether the fees are self-employed income, employment income, or partnership distributions. Your adviser will model the after-tax position so you know the headline fee versus what you net.
20. Are there any anti-avoidance provisions I need to be aware of that could re-characterise part of the consideration as income?
HMRC's anti-avoidance rules can re-characterise capital sums as income in defined circumstances, particularly where consideration is structured to look like a capital gain but is in substance remuneration for ongoing services. The boundary is fact-sensitive. Your adviser needs to satisfy themselves the deal structure stands up to these provisions before you sign.
The brief to your adviser
These twenty questions form the brief you take to your independent tax adviser. Whichever adviser you appoint, we share the proposed deal structure, the draft SPA, and any other documents the adviser asks for. The advice itself is between you and the adviser.
If you do not currently have a tax adviser separate from your own practice, the firm's professional bodies (ICAEW, CIOT, ATT) maintain searchable directories of members in practice. A tax-specialist adviser working independently of the deal is the right person for this conversation; ideally one with previous experience of practice acquisitions, though this is not essential.
What to do today
Three things, before the first conversation with a buyer if possible, and certainly before signing Heads of Terms:
- Identify your tax adviser. If you have one already, book a meeting. If you do not, find one through ICAEW or CIOT and book a meeting.
- Print this list. Take it to the first meeting. The questions are designed to fit into a one-hour working conversation.
- Bring the supporting documents. Last three years' accounts, personal tax returns for the same period, pension fund valuations, the practice's lease, and any prior disposals documentation that affects your BADR position.
The structural tax decisions on a practice sale are made before the negotiation, not during it. The cost of getting them right is one or two meetings with a competent adviser. The cost of getting them wrong, paid in tax, is usually a multiple of the fee.
Related reading
- A clean structure, not a leveraged earn-out the 50/25/25 mechanics with worked examples.
- Reading a Heads of Terms what becomes binding when, and what stays negotiable until the SPA.
- GRF multiple accountancy practice how the headline price is built up before the tax structure sits on top of it.
- Exit options for sole practitioners the wider context for choosing between sale, succession, and merger.