FinancesWhat tax do you pay when selling a business?

What tax do you pay when selling a business?

Selling your business is a mix of negotiating, legal work, dozens of process steps, and answering lots of questions from a potential buyer. Along with all these stages, there’s one important topic that you need to plan for carefully and that’s the tax implications of selling your business.

Understanding the tax you need to pay when selling a business in the UK is important both to ensure legal compliance and to make the sale as tax efficient as possible – which in practice means looking at ways to minimize your tax bill.

Tax implications when selling a business

When you sell a business in the UK, the main tax you will encounter is capital gains tax (CGT); you might be liable to pay CGT on any profit you make from the sale. CGT is a tax on the gains you make when you sell or dispose of an asset that has increased in value. In the context of selling a business, the gain is calculated as the difference between the sale price and the original cost of acquiring the business, taking into account any allowable expenses.

Capital Gains Tax (CGT)

Capital gains tax (CGT) is a tax that individuals and businesses pay on the profits they make from selling or disposing of certain assets. In the UK, individuals are subject to CGT on the sale of assets such as property, investments, and businesses. The rate of CGT depends on various factors, including the individual’s income tax band and the nature of the asset being sold.

Calculating Capital Gains Tax when selling your business

To calculate the capital gains tax when selling a business, you need to work out the gain made from the sale. You can calculate this by deducting the original cost of acquiring the business, including any allowable expenses, from the sale price. The resulting gain is then subject to CGT at the applicable rate, which is normally 10% for lower rate taxpayers and 20% for higher rate taxpayers.

It’s important to note that there are certain reliefs and allowances available that can reduce your CGT liability. One such relief is Entrepreneurs’ Relief, which is designed to encourage entrepreneurship by providing a reduced rate of CGT on the sale of qualifying business assets.

Business Asset Disposal Relief or Entrepreneurs’ Relief

Business Asset Disposal Relief (BADR) is also known as Entrepreneurs’ Relief (the official name for this relief changed to BADR in 2020) and provides a valuable tax relief available to business owners when they sell all or part of their business. Under this relief, the qualifying gains are subject to a reduced rate of CGT of 10%, rather than the standard rates that can be as high as 20%. To be eligible for Entrepreneurs’ Relief, certain conditions need to be met, such as holding at least 5% of the shares and being an officer or employee of the company for a certain period.

The benefits of Entrepreneurs’ Relief are significant. By taking advantage of this relief, business owners can reduce their tax liability and retain more of the proceeds from the sale of their business. It is important to carefully review the eligibility criteria and seek professional advice to ensure you meet all the requirements and can benefit from this relief.

Additional taxes

In addition to capital gains tax, there are other taxes that may be applicable when selling a business in the UK.

Corporation tax

If you sell a limited company, depending on the structure of the deal then you might have a corporation tax liability as well as capital gains tax.

Stamp duty

One such tax is stamp duty, which is payable on the transfer of shares or certain assets. Stamp duty is calculated based on the value of the consideration paid for the shares or assets and the applicable rates.

Income tax

Another tax to consider is income tax. If the sale of your business results in a significant increase in your income for the tax year, you may be liable to pay income tax at higher rates. It is essential to understand the potential income tax implications and plan accordingly to minimize your tax liability.

If you are selling a business that you operated as a sole trader, then you’re likely to pay income tax on the gains from the sale.

The deal structure will impact the taxes due

The way that you structure the sale of your business can have a huge impact on the taxes you pay. When you sell, you have a number of different ways to sell the business:

  • asset sale – the business sells one or more assets to the buyer; you keep your business but it now has fewer assets and has received cash from the buyer.
  • share sale – the owner sells their shares in the business to the buyer. The limited company structure remains but the buyer now owns the shares so takes control of the business, inheriting all the assets and liabilities.
  • merger – the business merges with another company; one company will be the lead business and there are different ways of organising the newly merged company such as creating a group.
  • MBO (management buy out) – the managers of a business buy out the owner, normally buying the shares from the owners so that the limited company structure remains but the owners change.

Minimizing tax liability

Minimizing your tax liability when selling a business requires careful planning and consideration of various factors. Here are some steps you can take to minimize your tax liability:

  1. Plan ahead: Consider the tax implications when making decisions about the structure of your business and the timing of the sale. Seek professional advice to ensure you have a clear understanding of the tax consequences.
  2. Utilize reliefs and allowances: Take advantage of tax reliefs and allowances, such as Entrepreneurs’ Relief, to reduce your tax liability. Ensure you meet all the eligibility criteria and seek professional advice to maximize the benefits.
  3. Consider alternative structures: Explore alternative structures, such as a management buyout or a share sale, that may have more favorable tax implications. Again, professional advice is crucial to ensure you choose the most tax-efficient option.
  4. Keep accurate records: Maintain detailed records of the acquisition and disposal of your business, including all relevant costs and expenses. This will help you accurately calculate your capital gains tax liability and provide evidence in case of any tax inquiries.

Professional advice when tax planning

It’s advisable to seek professional advice from a qualified tax advisor or accountant. A tax professional can provide you with expert guidance tailored to your specific circumstances, help you understand the available tax reliefs and allowances, and assist you in minimizing your tax liability. By working with a professional, you can ensure compliance with the tax laws and take full advantage of any tax planning opportunities.

Examples of tax calculations when selling a business

To illustrate the tax implications of selling a business in the UK, let’s consider two examples:

  1. Example 1: John sells his small business for £500,000. He originally acquired the business for £300,000 and had allowable expenses of £20,000. After deducting the allowable expenses, John’s gain is £180,000. With no tax reliefs or allowances, John would be liable to pay capital gains tax on this gain at the applicable rate.
  2. Example 2: Sarah sells her business and qualifies for Entrepreneurs’ Relief. She sells her shares for £1 million and meets all the eligibility criteria for the relief. As a result, Sarah’s gain is subject to a reduced rate of CGT of 10%, resulting in a lower tax liability compared to the standard rates.

These examples highlight the importance of understanding the tax implications and utilizing available reliefs to minimize your tax liability when selling a business.

Summary

Selling a business in the UK involves various tax implications that business owners need to consider. By understanding the tax you need to pay, such as capital gains tax, and exploring available reliefs and allowances, such as Entrepreneurs’ Relief, you can take control of your tax obligations and minimize your tax liability. It is crucial to seek professional advice to ensure compliance with the tax laws and make informed decisions throughout the process. Remember, proactive tax planning can make a significant difference in the amount of tax you ultimately pay when selling your business.

Written by

Anna Thornhill
Anna Thornhillhttps://gosmallbusiness.co.uk
Anna Thornhill is one of our expert writers. Anna is our specialist editor covering business growth and marketing and makes it her mission to provide small business owners with practical guides that help you step-by-step to grow your business. Anna’s an experienced sales and marketing professional who moved to writing and editorial and helps startups and small business owners with practical advice in growing their business with the latest sales and marketing techniques plus guides to choosing and using sales and marketing technology.

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