With many companies suffering from the effects of the recession, business owners looking for an exit are thick on the ground. One problem those in this situation face is that if their business is in a fairly weak financial position, it is difficult to take a tough stance when negotiating over the structure of the sale.

Purchasers will normally prefer to buy the assets of a company rather than its shares. Most vendors will prefer a share sale rather than an asset sale because of the availability of entrepreneur’s relief for Capital Gains Tax (CGT) purposes and the problems with extracting the cash from a company tax-efficiently if the assets of the company are sold. In practice, entrepreneur’s relief often means a maximum rate of CGT of 10 per cent is paid. Extracting funds by way of dividend means that the Income Tax dividend rate of 32.5 per cent is applicable.

One possibility is to put the company into liquidation when the assets have been reduced to cash. If this is done, the distributions will be treated as distributions of capital and taxed under the CGT rules. However, a formal liquidation can be expensive.

A second possibility is to dissolve the company informally. HM Revenue and Customs will by concession treat distributions in an informal dissolution as capital distributions. However, this approach is not without problems. A creditor of the company has 20 years from the date of an informal dissolution to make a claim against the company (in a formal liquidation, the period is two years) – a long time to live with any uncertainty.

In the event that a capital distribution is made, this will qualify for entrepreneur’s relief, provided certain conditions have been met for the 12 months prior to the distribution. These are that the person claiming the relief must have been an employee or director of the company, must own more than five per cent of the shares and the company must be a trading company. Any such capital distribution must be made within three years of the cessation of trade.