Tax on Selling a Business: A Seller’s Guide

It pays to be aware of the tax on selling a business. The last thing any seller wants to see is their profits eaten into by a huge tax bill on completion. Luckily though, there are a few different options you can take which can reduce the amount of tax you’ll have to pay out.

Without knowing how much tax you’re likely to be charged, it’s impossible to decide upon a fee that you’d be happy to sell your business for. This deduction will ultimately determine how much you’ll be left with after the sale, or even how much you can afford to pay creditors. By becoming familiar with every possible tax on selling a business, sellers can protect themselves against any nasty surprises.

Understanding the tax on selling a business can be difficult given its complex nature. This is why we always recommend that you seek the advice of a professional business sales service. Nevertheless, it’s important to have a basic knowledge of which taxes you can expect to pay.

 

Different types of tax when selling a business

Depending on how you go about your sale, you may be obliged to pay tax to HMRC. These will typically include Capital Gains Tax (CGT) and Corporation Tax.

 

Will I have to pay tax on selling a business?

Yes. The type of tax and the amount you pay will depend on both the operating structure of the business, the sale structure you opt for and whether or not you’re entitled to any tax relief.

Limited companies may be required to pay both Capital Gains Tax and Corporation Tax, while sole traders pay income tax instead.

 

 

What are the main methods of selling a business?

Share sale

This is a straight transfer of your shares in the business to another party. This includes all contracts, employees and anything else associated with the business.

 

Name, goodwill and asset sale

Here, the seller can choose to sell individual components of the company to one or multiple buyers. For example, they may sell company vehicles to one buyer and a patent to somebody different.

 

Merger

In a merger, your company combines with another to create one, larger business.

 

Management Buy Out

Management buy outs (or MBOs) occur when a company’s management team purchases a majority shareholding in the business.

 

Will I be taxed on capital gains when selling a business?

Yes. Any seller of a limited company will be liable for the taxation of any capital gains when selling a business.

 

What is Capital Gains Tax (CGT)?

Capital Gains Tax is applied to profits (capital gains) you make when selling your business. For example, if you purchased your business for £400,000, but sell it for £575,000, you would only pay tax on the £175,000 profit.

 

Capital Gains Tax for asset sales

You’ll still need to pay Capital Gains Tax if you opt for a name, goodwill and shares sale. The principle remains the same as a share sale in that you pay tax on any profit you make from each individual asset. This must be based on the original purchase price, even if you bought the assets for less than their market value.

Capital Gains Tax may still be applicable even if you sell it for less than it’s worth. In these instances, the gain is determined by the market value of the asset, rather than what it was sold for.

Assets may avoid Capital Gains Tax if they’re given away to a charity, spouse, or civil partner. There are some nuances to these rules, however. If you didn’t live with your spouse/partner during the relevant tax year, or they’ve sold the assets via their own business, you may still be liable for taxation on them. Similarly, if a charity pays even a small amount for your assets, then it could also open up some tax complications.

 

What is Corporation Tax?

Similar to Capital Gains Tax, Corporation Tax is a tax on any profits that are made. The difference between the two is that Capital Gains Tax applies to the business owner, while Corporation Tax applies to the business.

Corporation Tax is usually applied to profits made during a company’s everyday operations. It can also be applied to profits made through the sale of any assets it may own.

The rate of Corporation Tax a company pays is determined by the

 

Will I have to pay Corporation Tax when selling a business?

Only businesses are liable for Corporation Tax, not individuals. That means that if you sell your entire business in a share sale, you won’t need to pay Corporation Tax. If, however, your business has sold assets or other elements of the company, then any profit made from them would be liable for Corporation Tax.

As a basic rule of thumb, unless your business is selling its assets, you probably won’t need to pay Corporation Tax.

As of April 2023, the rates for Corporation Tax are as follows:

• Businesses with annual profits under £50,000 – Small Profits Rate (19%)
• Businesses with annual profits between £50,000 and £250,000 – Marginal Relief Rate (a gradual increase from the Small Profits Rate to the Main Rate depending on annual profits).
• Businesses with annual profits over £250,000 – Main Rate (25%)

 

 

How to avoid tax when selling a business

While there’s no way in which to avoid tax altogether, there are a few ways that you might be able to pay less.

Any profits that fall within a seller’s annual tax exemption amount will avoid Capital Gains Tax. Tax-free allowances were reduced to £3,000 per tax year since 6th April 2024. Prior to that it had been £6,000.

Basic-rate taxpayers will also avoid the higher rate of Corporate Gains Tax and pay 10% on their profits instead. Those above the basic-rate threshold (£50,270 as of the 2023/2024 tax year) are obliged to pay 20%.

This 20% rate can be avoided if the seller is entitled to Business Asset Disposal Relief (BADR)

 

Ways to reduce your Capital Gains Tax liability

If you have incurred costs when improving your business or assets ready for sale, or even in the selling process itself, you may be able to deduct these from your capital gains.

Eligible costs can include any valuation, advertising, acquisition and disposal fees involved in the sale. Any improvements made can also be deducted, providing that they’re not merely repairs or expected maintenance.

Unless the seller is thinking of reclaiming their VAT, they can also deduct any VAT. Stamp Duty Land Tax can be deducted too. Interest accrued on loans, however, cannot be deducted.

 

What is Business Asset Disposal Relief?

Business Asset Disposal Relief is the name that replaced Entrepreneurs’ Relief. This scheme allows sellers to pay just 10% Capital Gains Tax on qualifying profits. This can make for a sizeable saving, given that those above basic rate tax have to pay double that normally. This relief can be claimed as many times as needed until you hit the threshold of £1 million. This threshold was previously set at £10 million, but was dropped in March 2020.

 

Do I qualify for Business Asset Disposal Relief?

There are a handful of stipulations that have to be adhered to qualify for Business Asset Disposal relief. Sellers will be able to apply this relief if they sell all or even part of their business. It can also be applied to sales of shares of a company if you own at least 5% of the business.

Those selling all or part of their company will need to be able to prove that:

• They have owned the business for at least two years prior to the sale
• They haven’t already exceeded their £1 million BADR allowance
• Assets are sold within three years of the closure of the company they belonged to

Those selling shares will have to ensure that the following applies for a minimum of 24 months prior to the sale:

• They own at least 5% of the business
• They’ve been an employee or director at the company
• They’re entitled to 5% or more of the company’s net assets and distributable profits
• The company’s main focuses don’t involve non-trading activities such as investments (such activities can be included, but shouldn’t make up more than 20% of the company’s operations)

Even within these stipulations, there are some exceptions to the rules, and anybody selling a business would be well-served to seek the advice of a business sales professional. They’ll be able to survey the tax landscape specifically for your business, to ensure that any relief you’re entitled to is applied.

 

Put the stress of your sale in the hands of a professional business sales team

The tax on selling a business can be tricky to figure out. It’s crucial for sellers to know exactly what they can expect to receive from any sale. All figures need to be exact. As you can see from the examples above, there are several permutations that could lead to you paying more tax on selling a business than you need to.

We’ve helped countless businesses to navigate complex tax situations and company sales. By allowing us to look after the sale of your business, you can avoid the stress and complications inherent in the process. Our friendly and experienced team are able to make the whole process simple while providing some of the best prices on the market. Call us on 0800 975 0380, or email [email protected] for a free consultation to find out how we can help.