What are the most tax-efficient ways to buy out a business partner?

Buying Out Your Business Partner: A Tax-Efficient Guide

When it comes to buying out a business partner, one of the biggest challenges you may face is how to finance the transaction. Whether you're acquiring your partner's stake in the company due to retirement, a change in business goals, or a desire to move on to new ventures, you'll need to have a solid financial plan in place to make the transition as smooth as possible. 

The value of a payout for an existing shareholder can be significant, and as a result the tax implications of funding it can be very significant.

At Oldfield, we offer an integrated legal, accounting, and tax advice approach to help shareholders plan and execute a successful exit strategy. In this article, we'll explore some of the most common financing options for buying out a business partner, and the tax implications of each.

Personal SavingsThe most straightforward financing option for a business partner buyout is to use your own personal funds. This may include tapping into your savings account, using a personal line of credit, or even taking out a home equity loan. However, it's important to note that using personal funds to finance a business buyout can be risky. If the buyout fails, you may be left with significant debt and potentially damage your personal finances.

Tax implications

Aside from the risk involved in using personal funds, this isn’t a tax efficient option, as it involves using personal funds which you have already paid tax on (income tax on earnings, or dividend tax on dividends, or capital gains tax on the sale of an asset). Which means it can actually be one of the least tax efficient ways of funding a buy out.

Borrowing from friends and familyIf you have friends or family members who are willing to lend you the funds you need, this could be option. However, it's important to approach these loans with caution and ensure that you have a clear agreement in place for repayment.

Tax implications

While this option might give you straightforward access to funding, the repaying of loans to friends and family will have to come out of personal funds, which you will have to pay personal tax on to get into your hands. 

Selling assetsIf you have assets that you can sell, such as real estate, this can be an option for raising the funds you need. However, it's important to consider the potential impact on your personal finances and ensure that you're not sacrificing long-term financial stability for short-term gain. 

Tax implications

You need to look carefully at any capital gains you might have to pay to sell an asset to release funds – for example if you’re selling a residential buy to let property owned personally, you might have to pay 28% capital gains tax on any gain. 

Other financing optionsThere are a variety of financing options available for business buyouts, including loans from banks or other financial institutions. However, these options may come with higher interest rates and other fees – all adding to the ongoing costs and financial burden of a buyout scenario.  

Tax implications

While this option might give you access to funding, the repaying of loans, including the interest, will have to come out of personal funds, which you will have to pay personal tax on to get into your hands. 

Using company funds to buy out a shareholder through a holding company buyout If your company has a healthy cash flow and is generating profits, there is a way to use these company funds to finance the buyout.  Using company money is often the only way that the remaining shareholder(s) can afford to buy the leaver’s shares.

Tax implications

This is certainly possible, and can be a tax efficient route to go down, meaning company funds are used to pay out the exiting shareholders in a flexible way.  It does need to be done correctly if it is to be effective and tax efficient, and to avoid paying additional amounts of stamp duty.

At Oldfield Advisory, we have developed a Holding Company Buyout solution, which means that:

• Funds come from the company, rather than personally
• You have the ability to stage the buy-out payments, which assists cashflow
• The recipient of the buy-out is protected from Inheritance Tax exposure
• Stamp Duty on the transaction is mitigated, or even eliminated
   

If you would like further guidance on shareholder buyouts or to book a free consultation to discuss your specific requirements with one of our tax consultants - please fill out the form below

Please note: This article is provided for information only and was correct as at time of writing (06/04/23). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance.  No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.