Passing on your business through a management buyout

A loan note is simply an IOU wrapped in a legal document that often secures what you are owed against the assets of the company issuing it.  In this case it would secured against the value of your company and its assets which is what MBO Limited now owns.  For tax purposes, they are very useful as, if structured properly, you can hold or roll over your gain on the shares and only pay the tax when you redeem part or all of your loan note for cash.  They can also make sure that you only pay tax on the cash you receive – which can of course be lower than what you sell it for if things don’t work out.  We will come back to the tax further below.

So how does MBO Limited get the cash to pay you?  Well, it gets this from the trading company it now owns by either declaring and receiving a dividend (which it can do free of tax) or by borrowing money from the trading company (which may itself borrow money from a financial institution).

It is probably helpful to show how this all works with a diagram.

The tax treatment and why clearance matters

From a tax perspective, you as the seller will trigger a capital gain which is usually subject to capital gains tax at your prevailing rate with the benefit of business asset disposal relief (if applicable), which reduces the tax rate to 14% for the first £1million of consideration (rising to 18% from April 2026) from the usual rate of 24% (for most transactions).

We say ‘usually subject to capital gains tax’, as it is possible that HMRC could charge the transaction to income tax as a dividend – raising the tax liability to as much as 39.35% – where certain anti-avoidance legislation applies.  To some extent it is possible to get a level of comfort that you will obtain capital gains tax treatment by requesting and obtaining advance clearance from HMRC, which we strongly suggest that you do.

What this means for the management team

The end result for the team taking it forward is that they will own the business through their interest in MBO Limited, and will be able to settle the amount due to you without first having to take the money out of the company into their own hands which will of course trigger significant tax liabilities on them.  Again, HMRC can challenge this arrangement and again it will be included within the clearance application to get a level of comfort that the desired tax outcome is achieved.

Of course, this is very much a stripped back and simplified version of how an MBO works, and there are many factors – including tax- that we have either only grazed the surface of or not mentioned at all (like inheritance tax for example).  But, where you do not want to sell to a third party, and you are not keen on an employee ownership trust (EOT), an MBO is a very practical and pretty tax efficient way of passing on your business to the next generation.