A Management Buyout (MBO) can be an exciting opportunity for a company’s leadership team to take ownership of the business they help run. However, before diving into an MBO, it’s crucial to understand the tax implications involved. Taxes can significantly impact both the buyers (management team) and the sellers (current owners), influencing the structure and financial outcome of the transaction. 

Understanding these tax aspects can help you structure your MBO in the most financially beneficial way and potentially save thousands or even millions in taxes, depending on the size of the transaction. 

What is a Management Buyout?

A management buyout occurs when a company’s existing management team purchases all or most of the business from its current owners. This differs from other types of acquisitions because the buyers already work within the company and understand its operations, customers, and potential. MBOs typically happen when: 

• Owners want to retire but wish to see the business continue under familiar leadership. 
• A parent company decides to sell off a division or subsidiary. 
• A company faces financial difficulties, and management believes they can turn it around. 
• Owners want to realise the value of their business while ensuring its legacy continues. 

Key tax considerations in an MBO

Capital Gains Tax (CGT)

When the current owners sell their shares, they may be liable for CGT on any profit they make. The amount payable depends on factors such as the sale price, the original purchase price, and any applicable reliefs. 

Example: Suppose a business owner sells their company shares for £2 million after originally acquiring them for £500,000. The taxable gain is £1.5 million. If Business Asset Disposal Relief (formerly Entrepreneurs Relief) applies, the owner may benefit from a reduced CGT rate of 14% instead of the usual 24% for the first £1M of gain, significantly reducing their tax liability. The reduced rate will increase to 18% on 6 April 2026.  

It’s important to plan for CGT before completing an MBO. If the seller does not qualify for reliefs, they may explore deferral strategies or alternative structuring options to minimise immediate tax exposure.

Stamp Duty on Shares

If the MBO involves the purchase of shares rather than assets, Stamp Duty may be payable at a rate of 0.5% on the transaction value. While this might seem minor, it can add up, especially in high-value buyouts. 

Example: If a management team purchases shares worth £10 million, they may need to pay £50,000 in Stamp Duty. Planning and considering tax-efficient structures may help reduce this cost but detailed advice should be sought. 

Corporation Tax Implications

Many MBOs are structured using a new company (NewCo) that takes on debt to buy out the existing business. If not structured properly, the repayment of this debt could have negative tax consequences, as the deductibility of interest payments for Corporation Tax purposes may be restricted. 

Say a group of managers forms a NewCo and borrows £5 million to buy shares in the existing company. The interest payments on this loan might not be fully deductible for Corporation Tax purposes, increasing the overall cost of the transaction. 

Additionally, if the MBO is structured as an asset sale rather than a share sale, the target company may face capital allowances clawbacks or additional tax charges. It’s crucial to evaluate whether an asset or share purchase is more beneficial from a tax perspective.

Employment-Related Securities (ERS) risks

If shares are acquired by the management team at a discount or with deferred payment terms, HMRC may consider these as employment-related securities. This means the management team could face an immediate Income Tax and National Insurance charge on the ‘discounted’ amount. 

To avoid unnecessary tax burdens, management teams should seek professional tax advice on structuring their equity participation appropriately. Using growth shares, restricted stock, or other approved schemes can help mitigate exposure to ERS taxation. 

How to reduce tax liability in an MBO

To ensure tax efficiency, management teams and sellers should: 

• Seek Business Asset Disposal Relief to reduce CGT liabilities. 
• Structure financing in a tax-efficient way, ensuring interest payments qualify for deductions. 
• Use a NewCo structure carefully to avoid excess tax burdens. 
• Consider employment-related security risks when allocating shares. 
• Ensure VAT treatment is correctly applied to avoid unnecessary costs. 
• Goodwill and Intangible Assets: When buying a company, you’re often paying for its reputation, customer relationships, and brand value. These intangible assets, known as “goodwill,” have specific tax treatment: 
• Goodwill acquired in an MBO can be amortised (deducted) over 15 years for tax purposes. 
• This provides significant tax savings compared to non-deductible intangible assets. 
• The ability to amortise goodwill can significantly improve cash flow in the years following the buyout. 

Case Study: A successful tax-efficient MBO

Let’s look at an example of a well-planned MBO with tax efficiency in mind. 

Scenario

A mid-sized manufacturing company valued at £15 million undergoes an MBO. The management team, supported by private equity, sets up a NewCo to acquire the business. 

Tax planning strategies implemented:

• The sellers qualify for Business Asset Disposal Relief, reducing CGT to 14% for the first £1M of proceeds with 24% due on the balance for each shareholder.  
• The purchase is structured as a share acquisition to avoid VAT. 
• The management team receives growth shares to minimise Employment-Related Securities risks. 
• Debt financing is structured to ensure interest deductions are maximised without breaching thin capitalisation rules. 
• An Employee Ownership Trust (EOT) is also considered for long-term tax benefits and succession planning – this may remove the CGT liability entirely if relevant conditions are met.  

As a result, both the sellers and the management team successfully navigated tax challenges while optimising financial outcomes. 

Mastering MBOs

An MBO can be an excellent way for a company’s management to take control of the business, but tax implications must be considered carefully. 

Without proper planning, taxes can significantly increase the transaction cost, reducing the benefits for both sellers and buyers. Working with financial and tax advisers is essential to structure an MBO in the most tax-efficient way possible. 

Taking the time to plan the tax aspects of your MBO can lead to significant savings and improved cash flow in the years following the transaction. Remember that tax laws change frequently, so it’s essential to get up-to-date advice for your specific situation. 

By understanding and planning for these tax implications, management teams can navigate the process smoothly and achieve a successful ownership transition. The key to a well-executed MBO is balancing the financial, legal, and tax aspects to maximise value for all parties involved. 

About Gerald Edelman

Gerald Edelman was formed by the late Gerald Edelman in the 1940s and has established itself as one of the leading top 50 mid-tier firms in the UK.  

Today, Gerald Edelman remains committed to business, thinking beyond accountancy, delivering a wide range of financial, deal specific and strategic business advice.  

Recently, the Gerald Edelman Corporate Finance team earned recognition at the South East Dealmakers Awards, taking home three prestigious titles, Corporate Finance Team of the Year, Deal of the Year (+£40m), and Deal Maker of the Year, awarded to Partner Nick Wallis. The awards highlight the team’s excellence and ability to deliver results in all stages of the deals process.  

Having already advised many business owners in their exit strategies, the team has the experience and expertise to support you through the complexities and challenges of an MBO. 

Whether you’re considering an MBO or planning your next business move, the Gerald Edelman team would be happy to help you. Book an initial consultation today.