Introduction: Deciding to Sell Your Business
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Deciding to sell a business is a significant event. Aside from the emotional and operational aspects, one must also understand the tax implications of selling. Knowing the kind of tax you will need to pay is crucial for a smooth transition, whether you are a sole trader or part of a business partnership.
Capital Gains Tax: The Primary Concern
The main tax you pay when you sell your business is capital gains tax (CGT), which applies to the profits made from selling your business assets. The amount you need to pay will depend on several factors, including the structure of your business and how long you have owned the assets.
How Much Tax Will You Pay?
The rate of capital gains tax you pay will depend on your tax bracket and other income. In the UK, individuals’ capital gains tax rate is either 10% or 20%, depending on your income tax rate. However, businesses may be subject to corporation tax on chargeable gains, which currently stands at 19%.
Business Asset Disposal Relief
Formerly known as Entrepreneurs’ Relief, Business Asset Disposal Relief (BADR) may reduce your Capital Gains Tax when you sell your business. You must have owned the business for at least one year to qualify. The tax rate under BADR is 10%, allowing you to pay less capital gains tax on gains made.
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Allowances and Reliefs
Aside from BADR, you can claim other reliefs and allowances to reduce your capital gains tax liability. For example, everyone has an annual tax-free allowance, the Annual Exempt Amount. For the tax year 2023-24, this stands at £6,000.
Additional Reliefs
- Hold-Over Relief: This allows you to defer your capital gain until you dispose of the new asset.
- Incorporation Relief: If you transfer your business to a company, you may be able to defer any Capital Gains Tax.
Planning and Consultation
Before making any decisions, consult an accountant to fully understand the tax implications. Proper planning can help you maximise reliefs and allowances, reducing the tax you owe.
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Selling Business Assets: What is the Tax?
When you sell a business, you are often not just selling the entity but also various assets that are part of the business. These could range from physical assets like property and equipment to intangible ones like trademarks and patents. Each asset sale may be subject to capital gains tax. The amount you pay when selling business assets will depend on the asset’s value and how long you have owned it.
Asset Rollover Relief
You can claim Business Asset Rollover Relief if you sell an asset and buy another qualifying one. This allows you to delay paying Capital Gains Tax until you sell the new asset. Assets must be purchased within three years of selling the old one to qualify.
Gift Hold-Over Relief
If you gift business assets or sell them for less than their market value, you may be able to claim Gift Hold-Over Relief. This means any capital gain is ‘held over’ until the person you gave the asset to sells it.
Corporation Tax and Capital Gains Tax
Limited companies in the UK have to pay Corporation Tax on profits from selling business assets. Unlike individuals, companies do not have a tax-free allowance for capital gains. The current rate of Corporation Tax is 19%, but companies can reduce this by claiming reliefs like Business Asset Disposal Relief (BADR).
Reporting and Paying
When a business asset is sold, gains must be reported to HM Revenue and Customs (HMRC). For individuals, this is typically done through a Self-Assessment tax return. Companies usually report gains in their Corporation Tax return.
Tax Implications by Business Structure
The tax you pay when you sell your business can vary depending on the structure of your business.
Sole Traders and Partnerships
For sole traders and partnerships, the individual partners are personally responsible for any Capital Gains Tax (CGT). Reliefs like BADR and allowances can be claimed to reduce the tax bill.
Limited Companies
If you sell a limited company, the company itself may have to pay Corporation Tax on any gains. Shareholders may also have to pay Capital Gains Tax if they sell their shares.
Preparation: Knowing Your Tax Position
Before you even list your business for sale, it is crucial to understand your tax position. A business valuation will help you estimate the capital gains you will make from the sale. Knowing this allows you to plan for any potential tax liabilities and explore options to minimise them.
Sale Price and Tax Bracket
The sale price of your business will directly affect the amount of capital gains tax you will need to pay. Different tax rates may apply based on your total taxable income, which includes the gains from the sale. Be sure to factor this into your calculations when setting the sale price.
Tips to Reduce Capital Gains Tax
There are several strategies to reduce the capital gains tax on your business sale:
Timing the Sale
The timing of your business sale could impact the tax you pay. Selling the business in a tax year where you have less income could put you in a lower tax bracket, thereby reducing the capital gains tax rate applied to the sale.
Splitting the Assets
Selling the assets separately from the business might offer tax benefits. Each asset type may qualify for different reliefs and allowances, enabling you to pay less in overall tax.
Exploring Relief Schemes
Make sure you explore all available reliefs, such as Business Asset Disposal Relief or Business Asset Rollover Relief. You may be able to claim more than one relief, so consult with an accountant like Jack Ross to ensure you are maximising your benefits.
The Importance of Professional Consultation
Navigating the tax implications of a business sale is complex. An accountant can provide invaluable advice tailored to your specific situation. They can help you understand the tax implications, assist in structuring the sale to minimise tax, and guide you through the reporting and paying process.
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How much tax you will need to pay when selling a business depends on several factors. When selling a business, you may need to pay capital gains tax (CGT) and possibly corporation tax, depending on the structure of your business. The taxable gains will also depend on how much money you make from the sale of your business, and whether any of it qualifies for entrepreneur relief or certain other tax relief schemes.
There are various ways to reduce the amount of taxes owed when selling a business. For instance, if part of your business has been sold off in an asset sale, you may be eligible for lower rates of CGT or capital gains tax on the profits from that component. Additionally, entrepreneurs who have owned their businesses for at least 5 years may qualify for entrepreneurs relief which can reduce their Capital Gains Tax rate to 10%.
If you decide to sell only part of your business or dispose of company assets as part of an asset sale, the rules for taxation remain slightly different. Your taxable gains will still be calculated based on the difference between what was paid for the asset and what it was sold or disposed for but this time they will be taxed at the full rate unless it is eligible for certain tax relief schemes.