What are the tax issues to consider when selling your business?
If you are considering selling your business, it could be the biggest financial decision you make. Of course, along with a big financial consideration comes tax implications, so it’s important to understand how the choices you make impact on the tax you will need to pay when you sell your business.
Firstly, start thinking ahead and planning as early as you possibly can. Take professional advice so you understand your options.
Amongst various factors, the resulting tax payable from your business sale will depend on the structure of your company. The two main considerations:
Limited Company
If you are a limited company any profits generated by the sale of your business – or indeed, part of your business – will be liable for Corporation Tax.
You will need to report your financial gains on business asset disposals to HMRC on your company tax return. The resulting payment will depend on factors including any tax reliefs or allowances you may be entitled to.
Company assets include: land and property, equipment and machinery and company shares
For ‘intangible assets’ such as intellectual property and ‘goodwill’ the rules around Corporation Tax depend on when your limited company first owned them. Do take professional advice on this.
Further information can be found on the Government website: https://www.gov.uk/tax-when-your-company-sells-assets
Self-employed, sole trader or business partners
In these business structures, owners pay Capital Gains Tax if you make a profit on the disposal of all or part of a business asset. These assets include: land and buildings, fixtures and fittings, plant and machinery, shares, registered trademarks and ‘reputation’.
To work out whether you owe tax, it is normally the difference between what you paid v what you sold a business asset for. Of course, it may not be this straightforward and depends on issues such as how long / how you came to own the asset/s and how you disposed of the asset/s, as well costs associated with the asset. Again, seek professional advice to ensure you know whether you need to pay any tax liable.
Further information can be found on the Government website: https://www.gov.uk/capital-gains-tax-businesses
Options for selling
There are options for selling your business which have their own particular tax implications. For example, selling the trade or operating assets of the business v selling company shares. As part of your exit planning process you will need to assess the most tax efficient route to meet your own requirements.
If you sell the trade i.e. assets of the business, the seller is in effect the limited company, whilst company share sales means the company continues, the seller is the shareholder. The tax issues to consider are on any capital gains. For share sales the sales proceeds less any costs produce a taxable gain. For trade sales, any profit is taxed at normal corporation tax rates.
Entrepreneurs’ Tax Relief (ETR)
One important issue to consider is that a 2024 general election brings increasing uncertainty around potential tax changes. In particular, for business owners, there is a strong possibility that a change of Government may impact on Business Asset Disposal Relief (commonly known as Entrepreneurs’ Tax Relief).
ETR is a tax relief on Capital Gains Tax when selling all or part of your business. It reduces the amount of Capital Gains Tax on qualifying profits from 20% to 10%, up to a lifetime allowance of £1m. Currently this represents a potential tax saving of up to £100,000. Should a new Government remove this benefit it would increase exit taxes for business owners – as things currently stand the level of tax would double from 10% to 20%.
Get advice from the experts
Whatever your situation, selling your business requires expert advice and a planned approach that takes into account a tax strategy. After many years’ of hard work in developing your business, you want to reap the rewards when it comes to the sale – with a deal structured to meet your personal objectives.
And if you are considering selling your business in the near future, it’s important to understand your options now – and the possible implications of a change in Government. So don’t delay, start having the conversations now, and contact a member of our team if you would like advice on selling your business to achieve the optimal sale.