Highlights

• UK sellers rolling into a US sponsor's structure should confirm tax deferral, and any HMRC clearance, before heads of terms
• The location of the rollover vehicle affects UK reliefs and future exits
• Rollover and sweet equity should be analysed together
• Mixed UK and US management teams may need two rollover routes

When a US sponsor buys a UK business, the founders and managers are usually asked to roll part of their proceeds into the buyer's structure. The commercial terms are often agreed quickly. The tax consequences can take much longer, and they affect what the sellers actually receive.

These are the five questions we try to settle before heads of terms are signed.

1. Can the rollover be tax-deferred in the UK?

UK sellers will normally want the share-for-share exchange relief available under UK capital gains rules, so that tax is deferred until they eventually sell the new shares. The relief is subject to anti-avoidance rules, and advance clearance from HMRC is usually sought. That clearance needs to fit the deal timetable.

2. Where will the rollover vehicle sit?

US sponsors often prefer to issue rollover equity in a US or offshore holding company. That can work, but the location of the vehicle affects the availability of UK reliefs and the sellers' future tax position. A UK topco or a dedicated UK rollover vehicle may be more efficient for UK managers.

3. Are the instruments what they appear to be?

Rollover equity should normally be on the same terms as the sponsor's investment. If it is not, for example because it is subordinated or carries different rights, the sellers may be treated as receiving something other than shares for tax purposes, with less favourable results.

4. How does rollover interact with incentive equity?

Managers who roll over and also receive new sweet equity need both instruments considered together. Employment-related securities rules can apply to both, and the valuation of the sweet equity should take account of the rollover.

5. What happens on a partial exit?

If the sponsor later sells part of its stake or recapitalises the business, will the rolled-over sellers be able to participate on a tax-efficient basis? Tag rights and drag rights should be drafted with that in mind.

Don't forget the US side

US-resident managers, or UK managers who later move to the US, face different rules again. A rollover that is tax-deferred in the UK is not automatically deferred in the US, and the structure of the US holding entity (corporation or partnership) changes the analysis. On deals with mixed management teams, the rollover often needs two routes.

Our approach

We work with our US tax colleagues so that UK and US positions are agreed together. Settling these points early means the rollover is negotiated as part of the price, not discovered after it.

For more information, contact Priya Raman in London.