Share purchase vs asset purchase: ownership, liabilities and tax compared for UK buyers

Should you buy a business as a share purchase or an asset purchase? The structure of the deal has a huge impact on, among other things, the liabilities you take on as the buyer. There are three main differences between the two routes: what you actually own and control, which liabilities come with it, and how each is taxed. Understanding those three points is usually enough to point you towards the right structure.

Ownership and control: shares versus assets

In a share purchase you are buying the shares of a company. That means you are buying control and ownership of an existing legal entity. The entity itself stays exactly the same; the only thing that changes is who owns the shares in the company.

In an asset purchase you are buying specific assets from a legal entity. The company is the party to the contract, not the owner of the company. You are buying assets out of that business rather than buying the business itself: the premises, the equipment, the stock, the customer contracts, or whichever combination you have agreed.

An illustration I use with clients: a share purchase is buying a basket and everything that is inside it. An asset purchase is cherry-picking some of the items from the basket and leaving the basket behind. The basket, the company, carries on existing in the seller's hands with whatever was not sold still inside it.

Liabilities in a share versus asset purchase

This is the difference that matters most to a buyer. In a share purchase the starting point is that the buyer assumes all of the liabilities that come with the company, whether those liabilities are known or unknown. That is because the entity remains the same. Nothing about the company's past is wiped clean by a change in who holds its shares. Its contracts, its debts, its tax history and any claims against it all remain exactly where they were. The "unknown" part is the uncomfortable one: you can only investigate what you know to ask about. If a client who used the company three years ago is now unhappy and wants to sue, you, as the new owner of the company, are the one who has to deal with that claim.

In an asset purchase, typically you only take on the assets and liabilities that you have specifically decided to take on. The history of the selling company stays with the selling company. That is the main reason buyers who are nervous about a target's past tend to prefer an asset deal, and why sellers tend to prefer a share deal that lets them walk away clean.

It is also why due diligence and the warranties in the share purchase agreement matter so much more in a share purchase: you are inheriting everything, so you need to know what everything is, and you need contractual protection from the seller for whatever you could not find.

Tax on a share purchase versus asset purchase

The third difference is tax, and I should say at the outset that I am not a tax adviser, so you would need independent advice on your own position. In outline:

• Share purchase: buyer. Typically the buyer of the shares pays stamp duty on the purchase, so long as the purchase price is above £1,000. Stamp duty is payable at 0.5% of the purchase price.
• Share purchase: seller. The seller of the shares may have to pay capital gains tax on the sale. Bear in mind that a lot of sellers of businesses benefit from business asset disposal relief, formerly known as entrepreneurs' relief.
• Asset purchase: buyer. Where the assets include land, the buyer will typically pay stamp duty land tax on the land they have bought. The buyer may also end up paying VAT on certain assets. There are reliefs: for example, you may not have to pay VAT if the sale is treated as the transfer of a business as a going concern.

Taken together, the tax treatment is often one of the reasons a seller pushes for a share sale and a buyer weighs up an asset purchase. It should be looked at early, alongside the liability question, rather than after the heads of terms have been signed.

Choosing between the two

There is no universally right answer, and in my experience the decision is often driven as much by the seller's position as by the buyer's preference. A share purchase gives you the whole company, its contracts and its history in one go, with the trade-off that the history includes the liabilities. An asset purchase lets you select what you take, with the trade-off that each asset and contract has to be transferred individually and the tax treatment is different. The right choice depends on what you are buying, what you have found in due diligence, and what each side is prepared to accept on tax. It is a decision to make deliberately, before the heads of terms, because changing the structure part-way through a deal means reworking the documents and often the price.

Next steps

Before you agree a structure in the heads of terms, decide whether you need the whole company or only certain assets, and be clear about which liabilities you are willing to inherit. Then speak to a corporate solicitor about the legal structure and to a tax adviser about the tax consequences of each option, so the decision is made with the full picture rather than corrected later.