Let’s face it: grappling with the concept of tax isn’t easy, and many business owners aren’t waking up in the morning thinking “I can’t wait to sort out my taxes”.
Tax when selling a business is a complex subject, and many business owners hire a credible accountant to do the legwork. However, tax is one of the most crucial parts of selling a business, and every business owner should familiarise themselves with tax implications.
In this article, we’ll offer a clear and helpful explanation of tax on a business sale. This will help you structure your sale to promote tax efficiency, capitalise on opportunities, and avoid unnecessary risks.
Whether you’re selling a business to retire, start a new venture, or diversify your portfolio, understanding tax implications to maximise value is an important part of the selling process. As a starting point, there are two things you need to do: understand the main business taxes and prepare your business sale in advance.
Firstly, understanding the main business taxes will help you structure the sale of a business. These are:
- Corporation tax
- Income tax
- NI (National Insurance)
- VAT
- Business rates
- Dividends tax
- CGT (Capital Gains Tax)
Secondly, planning your business sale far in advance will help you maximise your selling price on a tax-efficient basis. Ask yourself the following questions:
- When do you want to sell your business?
- What stage of the economic cycle do you want to sell your business in?
- What will your selling price be?
- Will you pursue an asset sale or a share sale? We’ll get to the tax implications of each later.
- Will you be involved in the business post-sale? If so, for how long?
- What strategies will you take to minimise tax liabilities from the business sale?
The tax consequences of selling a business will depend on the structure of your business, the profits you make from selling your business, and your eligibility for tax relief schemes.
Now, let’s dive into tax considerations when selling a business in the UK.
The most important tax implications when selling a business
To help you maximise the value of your business and avoid hefty tax bills, here are the most important tax considerations when selling a business.
Capital Gains Tax
Capital Gains Tax (CGT) on a business sale applies to sole traders or partnerships. You’ll pay CGT if you plan to pursue an asset sale under these business structures.
Simply put, CGT is what you’ll pay on the ‘gains’ (or profit) you made on an asset you’re selling. This could be land and buildings, equipment, trademarks, or intangible assets like goodwill. This tax rate varies between 10% - 20%, depending on your income tax band.
The gain you make on an asset is usually the difference between how much you purchased it for and how much you sell it for. Using a Capital Gains Tax calculator will help you understand how much tax you’ll pay on an asset.
It’s important to mention that the tax allowance on CGT is being reduced by 50%. In April 2023, this allowance was £6,000. This will be reduced to £3,000 in April 2024.
Business Asset Disposal Relief
The Business Asset Disposal Relief (BADR) is a tax relief from CPT, albeit with strict qualification requirements. If eligible, business owners can pay a lower CGT tax rate of 10% on the first £1 million of gains.
If you plan to pursue an asset sale and apply for BADR, you need to be a sole trader, business partner, or owner of the business for at least two years.
If you plan to pursue a share sale, you need to be an employee and the company’s activities need to be trading for at least two years.
If you cannot qualify for BADR, you can consider the Employee Ownership Trust. CGT is exempt from this tax incentive (if conditions are met).
EIS - Deferral Relief
This is a strategic way to temporarily avoid the tax levy from CGT obligations. The Enterprise Investment Scheme allows you to reinvest your ‘gain’ into EIS shares or an EIS fund. This will defer your CGT bill.
It’s important to note that this does not mean you won’t pay it. You’ll simply move it to a later date or another tax year.
Of course, there are conditions you’ll need to meet, such as having held an EIS share for at least 3 years. Other conditions are clearly mentioned in the link above.
Corporation Tax
If you’re pursuing an asset sale and you’re a limited company, you can expect to pay Corporation Tax. Limited company Capital Gains Tax does not exist. Instead, limited companies will pay a Corporation Tax on their sold assets, like property or land, equipment, or shares.
The UK Government website gives a great example of how to calculate the chargeable gain on an asset.
Inheritance Tax
This tax implication is often forgotten, because it is not a common occurrence. However, failing to plan for it can result in a hefty tax bill. Inheritance Tax is a staggering 40%.
If a business owner dies after passing down their business to a family member, there’s a risk that HMRC can take a significant proportion of the proceeds via IHT (Inheritance Tax).
So, let’s say a child inherits a business property worth £1 million. The tax-free threshold for Inheritance Tax is £325,000 at the time of writing. Without applying for Business Relief, HMRC will take 40% of anything above that.
£1,000,000 - £325,000 = £675,000
£675,000 x 40% = £270,000
It’s crucial that you understand the implications of Inheritance Tax before passing down any asset or share to a family member. We’d recommend hiring a professional accountant for this.
Share or asset sale?
Negotiation dynamics will steer the structure of the sale toward a share or asset sale. However, it’s important to understand which one will be the most tax efficient for the seller.
Simply put, an asset sale is when a buyer acquires the tangible and intangible assets of a company. A share sale is when a buyer acquires the shares of company, including assets, liabilities and obligations.
Share sales are a simpler and more tax-efficient structure for sellers, as they have less tax liabilities. Asset sales, on the other hand, can be double taxed (once on the gains and second on the distributed proceedings).
Asset sales are better for buyers, and share sales are better for sellers.
What is the most tax-efficient way to sell a business?
Here are some of the most tax-efficient ways to sell a business:
- If you’re a sole trader or business partnership, the most tax efficient way to sell a business in the UK is by utilising Business Assets Disposal Relief (BADR). If you’re eligible for this tax relief, the first £1 million of lifetime gains will only be subject to 10% CGT, instead of 20%.
- Negotiating a share sale (instead of an asset sale), which has less tax liabilities.
- Investing in an Enterprise Investment Scheme (EIS) or a Seed Enterprise Investment Scheme (SEIS). EIS allows you to delay your CGT, and SEIS allows you to avoid CGT on a gain of up to £100,000, provided you invest it into an approved seed company.
- Selling your business to an Employee Ownership Trust (EOT), which exempts you from paying CGT.
FAQs
Do you get taxed for selling a business?
Yes, you do. Regardless of your business structure, you will pay tax on a business sale. This could be Capital Gains Tax or Corporation Tax.
How much tax will I pay on the sale of my business?
This answer is not clear cut, as it depends on your sale and business structure, including the value of your business. It will also depend on whether it is an asset sale or a share sale.
If you need to pay Capital Gains Tax, this tax rate can vary between 18% - 28%.
If you need to pay Corporation Tax, this tax rate can vary between 19% - 25%, depending on your company’s profits.
How do I avoid Capital Gains Tax when selling my business?
The best way to avoid or reduce Capital Gains Tax when selling a business is to:
- Use the Business Assets Disposal Relief.
- Invest in the Enterprise Investment Scheme or Seed Enterprise Investment Scheme.
- Sell your business to an Employee Ownership Trust
How are capital gains calculated when selling a business?
You’ll pay CGT on the difference between what you paid for an asset and how much you sell it for.
Here’s a simple example:
You sell shares and make a profit of £20,000. Your tax-free allowance on this is £6,000 (until April 2024).
£20,000 - £6,000 = £14,000 that tax is owed on.
If you have a basic-rate tax band, you’ll pay 10% CGT on £14,000 = £1400.
The bottom line: tax on selling a business
Understanding how tax works and how to sell your business on a tax-efficient basis will benefit you when the time comes to sell. The most important thing to consider is when and how you’ll prepare for the reality of tax burdens.
Hiring a professional accountant and preparing your business for sale far in advance of selling it is the best way to sell your business tax efficiently. This is because you’ll give yourself time to research tax relief schemes and find ways to reduce the amount of tax you’ll pay.
If you’d like a more comprehensive understanding of what it takes to sell a business, you can read our selling a business guide.
When you’re ready, you can advertise your business for sale on BusinessesForSale.com, and connect with local, national and international buyers.
@Be_theBoss