What are the tax implications of selling a business?

Summary

• Companies can choose different methods of operating, which can affect the type of tax they pay when selling their business.

• When owners sell their businesses, capital gains tax (CGT) and corporation tax can be deducted from the profits.

• Business assets disposal relief is one of the primary methods of reducing tax when you sell your business.

• If you’re selling your business or need financial advice, Unbiased can connect you with a qualified accountant.

What is a limited company?

A limited company (LC) is a broad term for a business where an owner's liability is limited to the amount they invested or guaranteed the company.

So, it is a separate entity from the business owner.

An LC can be private or public. Private limited companies are typically small businesses, while public limited companies are usually large firms that trade on a stock exchange.

People starting new businesses often choose to open a limited company.

As the company is a separate entity, the owner will not be liable for the firm's debts if it goes under. Being a limited company also means you may be entitled to tax advantages.

Companies operate in other ways.

Aside from limited companies, business owners can choose to operate as:

• A sole trader where the business is managed and owned by the same person, and the owner is responsible for the business's debts.

• A partnership where more than one person owns and manages the business, and all share in the liability for the company's debts.

What are the tax implications of selling your business?

Selling a business can be exciting and lucrative. However, it's essential to know the costs and the tax implications of selling up.

When selling your business, you may be liable for various taxes, including capital gains tax (CGT), business asset disposal relief, and corporation tax.

It is always wise to hire someone to advise you on possible tax relief options.

In addition to taxes, various fees may apply during the sale of a business.

A business broker may charge a fee of 1%-10%, depending on the sale amount. 

There will also be legal fees, generally at least 1% of the final sale value. Accountancy fees may reach £5,000, depending on the size of the company and the work involved.

You may also have to pay conveyancing fees and for licenses, permits, and energy performance certificates.

If you've employed someone to give HR advice regarding your employees or hired an escrow agent to hold the funds until the transaction is complete, you will have to pay for this as well.

How can I sell my business?

When considering how to sell a business in the UK, entrepreneurs have many options to consider, each with implications for tax, legal obligations, and future control of the business.

Some of these methods include:  

• Asset sale: The buyer purchases specific assets and liabilities of the business instead of acquiring the company itself.

• Share sale: A share sale involves the transfer of ownership of the whole company, including its assets, liabilities, and legal obligations. This option can offer potential tax advantages, like business asset disposal relief for qualifying sellers.

• Management buyout (MBO) or management buy-in (MBI): In an MBO, the company's existing management team purchases it from the owner. An MBI occurs when external investors or managers acquire the business. It may offer tax planning opportunities for both parties.

• Merger or acquisition: A merger occurs when two or more businesses combine to form a new entity, while an acquisition involves one company purchasing another. These can be structured in various ways, including share exchanges, cash transactions, or a combination of both, each with distinct tax implications.

How do I know how much tax to pay when selling a business?

Knowing how much tax to pay when selling a business requires an understanding of the three types of tax that apply:

• Capital gains tax

• Business asset disposal relief

• Corporation tax

Capital gains tax

One of the tax implications of selling a business is the requirement to pay CGT on the profits from the sale.

For the 2024/25 tax year, basic rate taxpayers will pay 10% on the profits from the business sale, while higher and additional rate taxpayers pay 20%.

However, the tax-free allowance has recently been cut from £6,000 to £3,000.

A seller may be able to claim relief with business asset disposal relief, which reduces the CGT rate to 10% in certain conditions.

Business asset disposal relief

Business asset disposal relief was previously known as entrepreneurs’ relief and is a type of CGT relief. There is a £1 million lifetime limit in the 2024/25 tax year.

You can claim business asset disposal relief if you're an individual selling your business or shares in the company or are an employer or director selling shares in a company where you're employed.

Eligibility for this tax relief also involves being a business partner or sole trader and having owned the company for a minimum of two years.

The deadline is 31 January in the tax year after you dispose of the business.

Corporation tax

Corporation tax is applicable when a business owner sells part or all of a limited company's assets.

The tax rate for limited companies is 26.5% for profits under £250,000 but 19% if profits are less than £50,000. If profits are over £250,000, the tax rate is 25%.

Sellers may be able to reduce their corporation tax bill by claiming business asset disposal relief.

Get expert financial advice

Selling a company can be profitable, but numerous costs can affect the bottom line.

The tax implications of selling a business can have a significant effect on profits, and the same applies to fees charged by professionals assisting with the sale. 

It's worthwhile finding a qualified accountant to advise on tax reliefs and allowances. Let Unbiased match you with the right financial professional for your needs.