Selling a business: 5 key tax considerations

Selling a business: 5 key tax considerations
  • Financial planning
  • 4 minute read

Whether you’re selling your business to retire, move on to a new venture, or diversify your wealth, planning ahead is crucial. Not only does advance planning help you better understand the business sale process, but it also helps you understand the potential tax implications of the sale.

In this article, we look at how to start planning for a business sale and highlight some key tax issues to consider.

Selling a business: start planning early

It’s sensible to start thinking about the sale of your business several years before you intend to sell. Planning ahead will make the sale process more efficient and also help you maximise your selling price.

Early on in the planning process, it’s a good idea to write down your specific goals and objectives for the sale. These might include:

  • Selling the business by a certain date
  • Selling the business during a certain stage of the economic cycle
  • Selling the business at a certain price
  • Receiving payment for the sale in cash
  • Being involved in the running of the business after the sale
  • Minimising tax liabilities from the sale

Thinking about the company’s valuation is another important part of the planning process. Determining the valuation is not always straightforward. Here, a business sales adviser can be useful. An adviser will be able to provide a realistic business valuation and help you with the planning process. They may also be able to help you find potential buyers.

When planning your business sale, you may also want to consider other ways of exiting your business in case you are unable to find a buyer. Some other options to consider include passing the business on to a family member or a management buy-out. 

Selling a business: tax considerations

One of the most important aspects of business sale planning is considering the tax implications of the sale. You don’t want to be hit with a large, unexpected tax bill. The tax consequences will depend on a number of factors such as the structure of your business, how much you make from the sale, and whether you are eligible for certain tax relief schemes. Below, we look at five tax issues to consider when selling your business.

Capital Gains Tax

If your business is set up as a sole trader or partnership, you may have to pay Capital Gains Tax (CGT) if you make a profit when you sell or dispose of all or part of a business asset.

Business assets you may be required to pay CGT on include:

  • Land and buildings
  • Plant and machinery
  • Shares
  • Intangible assets such as goodwill, registered trademarks, and customer lists

You’ll need to work out your gains and then consider your personal allowance (for the 2020-21 tax year you can earn up to £12,300 in capital gains free of tax) to determine whether you need to pay tax. You can find out more about Capital Gains Tax in our article.

Entrepreneur tax relief

If you’re selling a business you may qualify for a special Capital Gains Tax relief called Business Asset Disposal Relief. This was previously known as ‘Entrepreneurs’ Relief.’

With Business Asset Disposal Relief, you pay a lower CGT rate of 10% on the first £1 million of gains when selling a qualifying business. This means that if you’re a higher or additional-rate taxpayer who would normally pay 20% CGT on most assets, you’ll effectively pay half the usual CGT rate.

There’s no limit as to how many times you can claim Business Asset Disposal Relief. However, from 11 March 2020, you can only claim up to £1 million of relief in total during your lifetime.

To qualify for Business Asset Disposal Relief, you need to meet certain conditions. You can find out more about the qualifying conditions here. As with any kind of tax relief, it’s easy to get caught out on a technicality. If you are unsure about whether you qualify for Business Asset Disposal Relief it’s worth speaking to a qualified tax specialist.

Deferral Relief

You may be able to delay paying Capital Gains Tax by taking advantage of Deferral Relief. This is available through the Enterprise Investment Scheme (EIS). This scheme is designed to encourage investment into early-stage UK companies that are not listed on the stock market.

Deferral Relief enables you to defer a CGT liability arising from the disposal of any asset by investing in new shares of qualifying unquoted trading companies. It’s important to understand, however, that EIS investments can be higher risk and are therefore not suitable for everyone. If you’re considering the EIS, it’s a good idea to speak to a financial adviser.

Corporation Tax

If your business is set up as a limited company, you’ll pay Corporation Tax on profits generated from the sale of business assets. You’ll need to work out your gains to find out whether you need to pay tax. Then, you’ll need to report your gains to HM Revenue and Customs (HMRC) when you file your Company Tax Return. How much tax you pay will depend on any allowances and reliefs you claim.

Tax implications of shares

If you’re thinking about selling your business for shares, there are other tax issues to consider. One major advantage of accepting shares as payment is that you may be able to defer your CGT liability. The gains on a disposal of shares can potentially be rolled over until the shares are eventually disposed of. Another advantage of taking shares is that they may qualify for relief from Inheritance Tax through Business Relief.

On the downside, shares may result in the loss of Business Asset Disposal Relief. So, this strategy needs to be considered carefully, ideally with the help of a tax specialist.

Align your business sale tax strategy with your goals

Selling a business is often the culmination of many years’ hard work. It’s important to get it right. The earlier you start planning for the sale, the more prepared you’ll be when it comes time to sell.

Because tax is a complex area, the best strategy is to contact a qualified tax expert before the sale process begins. With professional input, it should be possible to structure a sale transaction that minimises your tax liabilities.

To find out more, or if you have any questions about business sale tax implications, don’t hesitate to request a call back by clicking below.

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Capital at risk. Any tax benefits will depend on your personal tax position and rules are subject to change.

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