Selling the Business: Preparation, Deal Structure and Exit Tax

Overview

The tax cost of leaving a business is not settled on the day the sale agreement is signed; it is settled years before. The general mechanics of capital gains — the moment of disposal, the rates, the identification of lots — are covered in the separate review of capital gains tax; what follows is only the deal layer, which that topic does not reach: the choice between selling shares and selling assets, the exemption conditions for a corporate seller, the blocking periods that follow pre-sale restructuring, deferred consideration, escrow and the fate of the team's share options. This layer has its own logic: its own forms and elections with their own deadlines, its own periods within which any movement of shares costs money, and its own mistakes, none of which arise on the sale of a securities portfolio. The frame is comparative — the United Kingdom, Germany, France and the United States — because deal structure is almost always cross-border and the decisions are taken by comparison.

Why the seller's and the buyer's interests are opposed

In a share deal the shareholding itself is sold: the seller takes a capital gain at a preferential rate or under an exemption, while the buyer inherits the company's entire history together with its tax and legal risks and gets no step-up in the base cost of the assets. An asset deal reverses this: the buyer brings the assets onto its balance sheet at the purchase price and writes them down, while the seller pays tax at company level and then again when the proceeds are distributed to the shareholder.

The United States offers a fork that Europe does not have: under IRC §338(h)(10) a sale of stock may be taxed as a sale of assets. The election is made jointly — by the buyer and the seller's common parent, or by all the shareholders of an S corporation; the form is due no later than the fifteenth day of the ninth month after the acquisition date (Instructions for Form 8023, rev. October 2023). The parallel §336(e) mechanism operates in configurations where there is no corporate buyer. Economically this is a negotiation about price: the step-up costs the buyer money in future deductions, and the difference between the seller's tax outcome under the two scenarios has to be reflected in the price (a gross-up), otherwise the election simply shifts the burden onto the seller for nothing.

Participation exemptions on a share sale: what has to be in place in advance

Where the seller is not an individual but a holding company, the question of the rate gives way to the question of exemption. The UK Substantial Shareholding Exemption requires a holding of at least 10% of the ordinary share capital, with a corresponding entitlement to profits available for distribution and to assets on a winding up (TCGA 1992 Sch 7AC para 8(1)), held continuously throughout a twelve-month period beginning not more than six years before the day of disposal (para 7). The six-year window is an important detail: entitlement to the exemption does not evaporate the moment part of the holding is sold.

Germany takes a different route. Under §8b(2) KStG a gain on shares is exempt with no minimum participation threshold, but §8b(3) sentence 1 treats 5% of the amount as non-deductible expenses; the effective burden at corporate level is around 0.75% (Bundestag research service, WD 4-3000-085/24, 2024). The continental participation exemptions — Dutch, Luxembourg and Cypriot — are covered in the review of holding structures, together with the substance requirements. What matters here is something else: every one of these regimes is tested at the date of disposal against a state of affairs put in place well beforehand. Inserting a holding company into the structure a month before signing means failing every holding-period test there is.

Pre-sale restructuring and the periods within which it stops being safe

Moving the trading company under a holding company before a sale is a standard step, and in Germany and France it carries a price measured in time.

Germany: §22 UmwStG 2006 imposes a seven-year Sperrfrist after shares or a business have been contributed at book value. A disposal within that period retrospectively creates an Einbringungsgewinn I (contribution of a business) or II (contribution of shares), with tax assessed for the year of the contribution. The relief is linear: the amount is reduced by one seventh for each full year that has elapsed since the contribution date (§22(1) sentence 3). A separate procedural trap sits in §22(3): the holder must prove, no later than 31 May each year, that the shares still belong to him; if the deadline is missed, the shares are deemed to have been disposed of on the anniversary of the contribution. The confirmation is filed seven years running, and silence here is not neutral conduct but a deemed sale.

France: the apport-cession mechanism under article 150-0 B ter CGI defers tax on the contribution of shares to a controlled company, but it requires reinvestment if the contributed shares are sold within three years. The 2026 finance act (LOI n° 2026-103 du 19 février 2026) tightened the conditions: the reinvestment quota was raised from 60% to 70%, the reinvestment period extended from two years to three, the minimum holding period for the assets acquired with the reinvestment increased from one year to five, and property transactions and purely financial activity were removed from the eligible destinations. A caveat: the exact date from which the new rules apply to particular transactions has not been checked against the primary transitional provision — part of the commentary ties them to transactions after 21 February 2026, part to the date of publication of the act.

The individual seller's rate and the timetable of the UK reform

For a UK founder selling personally the key figure is Business Asset Disposal Relief: 14% in tax year 2025/26 and 18% from 6 April 2026, subject to a lifetime limit of GBP 1m (HMRC CG64174). The reform comes with anti-forestalling: for unconditional contracts entered into on or after 30 October 2024 the disposal is treated, for rate purposes, as taking place on completion rather than on the date of the contract, unless the parties claim the exclusion. The threshold for making that claim is GBP 100,000 of aggregate untaxed gains. The general rule in TCGA 1992 s.28, under which a disposal is dated by the contract, is specifically overridden in this construction. The practical conclusion: a contract signed in March 2026 with completion in May is taxed by default at 18%, and the only way to change that is a claim for exclusion made in time.

Deferred consideration: earn-outs and installment sales

An earn-out is not a deferred payment but a separate asset. A right to unascertainable deferred consideration is characterised as a chose in action rather than a debt: Marren v Ingles, 54 TC 76 (HMRC CG14990, page updated in 2026). The consequence: the market value of the right is taxed at the time of the sale, and the later actual payments give rise to a second disposal — of the right itself.

Where the earn-out is satisfied in shares or loan notes of the buyer, it is automatically treated as a security with rollover of base cost. An election under s.138A TCGA 1992 allows that treatment to be disapplied. The deadlines are strict: for companies, two years after the end of the accounting period; for everyone else, by 31 January following the tax year after the year in which the right was conferred; and the election is irrevocable (HMRC CG58020).

In the United States deferred consideration follows the installment sale rules, but §453A charges interest on the deferred tax where the sale price exceeds USD 150,000 and the outstanding installment obligations at the end of the year exceed USD 5,000,000; the rate is set by §6621(a)(2). The USD 5m threshold is measured at the level of the partner or shareholder of a pass-through entity, and spouses each have their own.

Escrow, warranties and warranty insurance

Part of the price is almost always retained: escrow against breaches of warranty, a holdback against specific disputes. In the vast majority of UK and European deals that involve a W&I policy at all, the sellers' liability under the warranties is capped at a nominal GBP 1, and the policy becomes the buyer's principal protection (Orrick, UK Tech Exit Series — Warranty & Indemnity Insurance, 6 March 2026). A caveat: that is a share of the deals that carry a policy, not a measure of how many deals use W&I in the first place; the prevalence of W&I in continental Europe in 2026 has not been checked against primary sources. The economics of the policy: the premium is usually 0.5–2% of the sum insured, the sum insured itself is 20–40% of enterprise value, and the excess is 0.25–0.5% of enterprise value. Without a policy the founders remain personally liable under the representations and warranties for up to seven years after completion — a seven-year tail of personal liability that rarely reaches the negotiating agenda until it is too late.

The tax side of escrow is harder and varies more between jurisdictions: the question is whether the retained part is recognised as the seller's proceeds at completion or only when it is released. Being taxed on the full price when part of the money may never arrive is the classic overpayment scenario. A caveat: the treatment of escrow and holdbacks in specific jurisdictions was not verified against primary sources in this pass, and it needs local confirmation before signing.

What happens to the team's share options

The UK EMI scheme has been widened from 6 April 2026: the company limit is raised from GBP 3m to GBP 6m, the gross assets threshold from GBP 30m to GBP 120m, the headcount from fewer than 250 to fewer than 500 employees, and the option exercise period from 10 to 15 years (HMRC ETASSUM50500, Finance Act 2026). More companies now stay inside the favoured perimeter by the time they reach an exit. The widening is not universal: under ETASSUM50500 neither the increased limits nor the extended exercise period apply where the employer company is a Specified Northern Ireland Company — defined in paragraph 57F of Schedule 5 ITEPA as a company with its registered office in Northern Ireland carrying on a trade in goods, or the generation, transmission, distribution, supply, wholesale trade or cross-border exchange of electricity. For such a company the limits in force before 6 April 2026 continue to apply: GBP 3m of company options, GBP 30m of gross assets, fewer than 250 employees and a 10-year exercise period. In a group the limits are still tested against the group as a whole, but on the old scale where the option is granted to an employee of a Specified Company and on the new scale where it is granted to an employee of the other group companies.

A change of control is an event with consequences for options: some changes in a company's structure or status amount to a disqualifying event, after which the favoured treatment holds for a limited time only, while unexercised options are usually either accelerated or exchanged for options over the buyer's shares (rollover). A caveat: the list of disqualifying events on a change of control and the standard terms of accelerated vesting were not verified beyond page ETASSUM50500. The practice is constant: the option pool is unpicked at due diligence, not in the week of signing, because the employees' tax becomes part of the negotiation about price.

The deal date against the date of the change of residence

Where a sale coincides with a move, the order of the dates decides everything. Exit taxation under the German §6 AStG, the French article 167 bis, the Spanish 95 bis, the Canadian rules and the US §877A is covered in the review of exit taxes; the US founder relief, with stacking through non-grantor trusts, is in the material on QSBS §1202. What matters here is only the relationship between the dates: a disposal dated before residence is lost is taxed in full under the rules of the old jurisdiction; a disposal after the move falls under exit tax on unrealised gains plus taxation in the new country, and reliefs such as BADR or §1202 are lost or preserved depending on status at the date of disposal. The timing of a change of residence in the Spanish and Russian settings is covered in the materials on the Beckham Law at exit and losing Russian tax residence; immigration routes for an owner are in the review of visa options for a business owner.

Comparative framework

The exit timetable

Five years before the deal the structure is laid down: the holding company is created now so that by the date of disposal the holding periods for SSE or a participation exemption are satisfied and the German Sperrfrist has expired. Two years out the option pool is arranged and EMI qualification confirmed following the widening of the thresholds in 2026; in the United States §1202 compliance is checked against the holding period and the nature of the assets. Six months out vendor due diligence begins, the W&I question is settled and warranty liability is allocated — the premium and the policy limit affect the seller's net proceeds more than half the concessions made on price. In the week of signing only the calendar is left: fixing the disposal date against anti-forestalling, the agreement on Form 8023, the earn-out wording and the escrow release mechanics. The motivational layer — the shareholders' agreement, drag-along and tag-along, the management buy-out where there is no successor — is in the material on business succession.

Typical seller mistakes

They differ from the mistakes in the general capital gains topic because almost all of them are procedural. Restructuring inside a blocking period means an Einbringungsgewinn assessed retrospectively for the year of the contribution. Missing the annual confirmation due by 31 May means a deemed disposal without a single transaction. An earn-out tied to the seller's continued work means recharacterisation as remuneration, with social contributions. A missed deadline for the s.138A election means an irrevocable characterisation that can no longer be changed. A disqualifying event on the options, left unaddressed before completion, means a tax bill for the team instead of a relief. Escrow taxed on the full price means tax on money that may never arrive. And signing an unconditional contract without claiming the anti-forestalling exclusion means four percentage points of rate lost on the calendar.

Questions and answers