What is an asset versus share sale for tax purposes?

Based on the sources retrieved, I can provide a structured explanation of the key tax distinctions between an asset sale and a share sale. However, I should note that the retrieved sources do not contain a single definitive HMRC guidance page specifically comparing the two structures. I will draw on the relevant principles found across the sources.

Asset Sale vs Share Sale — Key Tax Distinctions

What the law says

Asset Sale In an asset sale, the selling company disposes of individual underlying assets (e.g. plant, machinery, goodwill, property). Each asset disposal is a separate chargeable event for corporation tax on chargeable gains under TCGA 1992. Where capital allowances have been claimed on an asset, a balancing charge may arise on disposal. The capital gains allowable expenditure is not restricted simply because capital allowances have been given, except where the asset is disposed of at a loss (TCGA92/S41).

Share Sale In a share sale, the seller disposes of shares in the company. Shares are themselves a capital asset under TCGA 1992, and any gain on disposal is a chargeable gain. For companies, a gain on the disposal of a substantial shareholding may be exempt under Schedule 7AC TCGA 1992 — the main exemption covers "gains on disposals of shares or an interest in shares". No such exemption is available on a direct asset sale.

The "Envelope Trick" / Degrouping The law recognises that a share sale can be used to avoid tax that would arise on a direct asset sale. Where a company transfers an asset to a wholly-owned subsidiary at no gain/no loss under TCGA92/S171(1) and then sells the shares in that subsidiary, the latent gain in the underlying asset is not crystallised on the share sale. TCGA92/S171(1) provides that intra-group asset transfers are treated as giving rise to neither a gain nor a loss. To counter this, degrouping charge rules apply in certain circumstances.

HMRC Guidance / Practice

Asset Sale — the seller's position On an asset sale, each asset is taxed separately. A direct sale of assets crystallises any accrued chargeable gain immediately. HMRC guidance confirms: "In general the no gain/no loss rule gives a group the opportunity to make a disposal of a company holding a particular collection of assets with no gain arising, whereas a direct sale of the assets would result in a gain."

Share Sale — the seller's position By selling shares rather than assets, the seller disposes of the "wrapper" (the company) rather than the underlying assets. The buyer acquires the company with its existing tax base costs in the underlying assets. HMRC illustrates this with the "envelope trick": a company owning an asset worth £10m with a base cost of £1m (accrued gain £9m) can transfer the asset to a subsidiary at no gain/no loss, then sell the shares in the subsidiary for £10m — producing no chargeable gain on the share sale, whereas a direct asset sale would have produced a £9m chargeable gain.

Buyer's perspective

• On an asset sale, the buyer acquires assets with a fresh market value base cost for capital gains purposes, and can claim capital allowances on qualifying plant and machinery from the purchase price.
• On a share sale, the buyer acquires the shares (not the underlying assets directly). The underlying assets retain their historic tax base costs inside the company. The buyer therefore inherits any latent gains and historic capital allowances pools. HMRC guidance on the "drain out dividend" scheme illustrates how a vendor can manipulate the value of a target company before a share sale to extract value tax-efficiently.

VAT An asset sale structured as a transfer of a business as a going concern (TOGC) may be outside the scope of VAT. HMRC guidance confirms that a movement of an entity or business to a group VAT registration following "the purchase of the entire issued share capital of a company or the assets of a business as a going concern" can be treated as commercially motivated. A share sale is outside the scope of VAT entirely (shares are not a supply of goods or services for VAT purposes), though input VAT recovery on deal costs may be restricted.

Summary Table

Important caveat: This is a complex area and the above is a high-level overview. The precise tax treatment will depend on the specific facts, the nature of the assets, the corporate structure, and applicable reliefs (e.g. Substantial Shareholding Exemption, Business Asset Disposal Relief). Professional advice should be sought for any specific transaction.