When selling your company the legal and professional costs can soon mount up, but what’s tax deductible and what’s not?
The cost of selling shares
When you sell shares in a private company there’s no stockmarket price to go by, instead it’s between you and the purchaser to hammer out a value. This is where solicitors and accountants get involved in the haggling process, helping with due diligence and drafting a contract. Their combined fees can rack up to thousands or even tens of thousands of pounds. The good news is that you are allowed tax relief for at least some of the costs.
Allocating the costs
If you’re selling your company as a whole it can be tricky to decide whose costs they are. If there are accountancy fees for reviewing the company’s records and ensuring they are in good order, they belong to the company, even though the reason they were incurred was because you’re selling your shares. You can’t therefore claim a deduction for them against your capital gains tax (CGT) bill.
Tip. Discuss fees with your accountant, solicitor etc. early in the sale process to ensure that they bill the right person, i.e. your company where appropriate. It will be entitled to claim a tax deduction for these but you won’t.
HMRC’s tough approach
Only expenses set out in s.38 Taxation of Chargeable Gains Act 1992(TCGA) can be taken deducted when working out a capital gain. HMRC applies this rule rigidly. Its internal guidance says “NO OTHER EXPENDITURE IS ALLOWABLE” . It uses capital letters to emphasise the point. So don’t expect any leeway from your local tax inspector.
What the rules say
S.38 TCGA is pretty clear on what costs you can deduct, namely “the incidental costs” which are wholly and exclusively for the purposes of buying or selling an asset, which is why allocating costs as we described above is important.
The legislation goes on to say that they must relate to:
- “fees, commission or remuneration paid for the professional services of any surveyor or valuer, or auctioneer, or accountant, or agent or legal adviser
- the transfer or conveyance (including stamp duty)” of the asset
- advertising for a seller/buyer ; or
- making a valuation required for the purposes of the computation of the gain.”
Expenses - now and then
As you can see there’s a broad range of expenses which can be claimed to reduce the amount of gain (or increase a loss) when you sell an asset. Some will be easy to recall when you complete your tax return with details of the sale as they’ll relate to a relatively recent event. But CGT calculations potentially cover a period of many years. For example, you might be selling shares in a company you bought 20 years ago and expenses for buying as well as selling them are deductible.
Tip. When you buy an asset remember to keep the purchase documents and other records safe as they might be required decades later. The purchase expenses you incur can be added to the cost of the asset and the total deducted from the sale proceeds when you sell.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.