This is the second of three articles in which we will look at the potential tax consequences of a VIMBO* transaction. Whilst the mechanics of implementing such a transaction will necessarily be touched upon, the intention is more to highlight the tax questions which are likely to be encountered. Previously, we consider the tax position of the vendor, and the final article will look at the corporate implications. This second article, however, focuses on the purchaser.

Whereas the vendor will generally be one person, and the main driver in the business, the purchasers will typically be a number of people. Usually, they will be involved in the management and running of the business, but this may not always be the case – a VIMBO process may commence without all relevant parties of the new management team being identified.

From an income tax perspective, not a lot changes for the management team. Wherever the management team were prior to the VIMBO, it is extremely likely that they were paid a salary, and thus suffered tax and NIC through the PAYE system. This will still be the case, as the new team will be Directors in the new company. Where there may be a variation is if the new team were to extract lower salaries with a view to paying down any debt and loan notes over a shorter period.

Whilst unrealistic in the short-term, once the debt commitments have been satisfied, there would be scope for the shareholders to extract profits by way of dividend. As a general rule, dividend extraction is more tax efficient than salary or bonuses, although the numbers should be looked at for each specific situation.

In order to buy into the new company, it may be necessary for the management team to obtain a loan to meet their personal capital requirement. If this is the case, any interest suffered would likely be deductible for income tax purposes.

The acquisition of the shares in the new company would be a capital transaction. These shares would typically be subscribed for at a value which is meaningful to the individual – which is why a loan mentioned above may be necessary. This would be the base cost of the shares, and would be deducted from the proceeds in the event of a future disposal. Any gain realised would be chargeable to Capital Gains Tax, and would qualify for Entrepreneurs’ Relief should the company continue to be a trading company, the individual continue to work for the company and own more than 5% of the ordinary shares.

In stark terms, future profits could be extracted at a tax rate of 10% compared to anything up to 63.8%.

If a capital loss were to arise on disposal, this could be offset against future capital gains. Alternatively, it may be possible to obtain income tax relief for the quantum of the capital loss.

Finally, it would be remiss not to consider briefly Inheritance Tax. The hope, clearly, would be for the management team to grow the business, and for their shareholding to mature into a valuable asset. Under current legislation, this would likely qualify for Business Property Relief, providing 100% relief from exposure to Inheritance Tax.

*A Vendor Inspired Management Buy Out is a commercially and tax efficient method of passing on a company to the next generation of family or next tier of management over a period of time, which works for the benefit of both the vendors and the buyers. Unlike under a traditional MBO, the whole processiscontrolled and driven by the Vendor.