Tax Implications of Selling Your Business: What You Need to Know

Selling your business in the UK? Learn about Capital Gains Tax, Entrepreneurs’ Relief, Inheritance Tax, and VAT considerations to maximise your proceeds.

Selling your business is a monumental milestone, but it comes with significant tax implications that can impact your financial outcome. In the UK, understanding the tax landscape is crucial to ensuring you retain as much of your hard-earned proceeds as possible. From Capital Gains Tax (CGT) to Entrepreneurs’ Relief, Inheritance Tax (IHT), and VAT considerations, this guide breaks down the key tax implications of selling your business and provides actionable advice to help you navigate the complexities.

1. Capital Gains Tax (CGT): What You Need to Know

When you sell your business, the profit you make is subject to Capital Gains Tax (CGT). This tax applies to the difference between the sale price and the original purchase price (or the value when you acquired the business).

Key Points:

• CGT Rates: For the 2023/24 tax year, the standard CGT rate is 20% for higher-rate taxpayers and 10% for basic-rate taxpayers. However, these rates can vary depending on the type of asset sold.

• Annual Exempt Amount: Each individual has an annual CGT allowance (£6,000 for 2023/24, reducing to £3,000 from April 2024). Gains below this threshold are tax-free.

• Business Asset Disposal Relief (formerly Entrepreneurs’ Relief): This can reduce your CGT rate to 10% on qualifying gains, up to a lifetime limit of £1 million.

How to Minimise CGT:

• Plan your exit to maximise the use of your annual CGT allowance.

• Consider spreading the sale over multiple tax years to utilise multiple allowances.

• Explore eligibility for Business Asset Disposal Relief (see below).

2. Entrepreneurs’ Relief (Now Business Asset Disposal Relief): A Valuable Opportunity

Entrepreneurs’ Relief, now known as Business Asset Disposal Relief (BADR), is a valuable tax relief that can significantly reduce your CGT liability when selling your business.

Eligibility Criteria:

• You must have owned the business for at least 2 years before the sale.

• You must be a sole trader, business partner, or own at least 5% of the company’s shares and voting rights.

• The business must qualify as a trading business (not primarily investment-based).

Benefits:

• Qualifying gains are taxed at just 10%, up to a lifetime limit of £1 million.

• This relief can save you up to £100,000 in tax compared to the standard CGT rate.

How to Maximise BADR:

• Ensure your business meets the qualifying criteria well in advance of the sale.

• Keep detailed records of your ownership period and business activities.

• Consult a tax advisor to confirm your eligibility and plan accordingly.

3. Inheritance Tax (IHT): Planning Ahead

If you’re considering passing your business to a family member or including it in your estate, Inheritance Tax (IHT) could become a concern. IHT is charged at 40% on the value of your estate above the nil-rate band (£325,000 for 2023/24).

Key Reliefs:

• Business Relief (BR): This can reduce the value of your business by 50% or 100% for IHT purposes, depending on the type of assets.

• Agricultural Relief: If your business includes agricultural property, this relief may also apply.

How to Minimise IHT:

• Transfer ownership of your business at least 7 years before your death to potentially remove it from your estate.

• Ensure your business qualifies for Business Relief by meeting HMRC’s criteria.

• Seek professional advice to structure your estate plan effectively.

4. VAT Considerations: Is VAT Applicable to Your Sale?

In most cases, the sale of a business as a going concern is VAT-free, provided certain conditions are met. However, there are exceptions, and VAT can apply to specific assets or transactions.

Key Points:

• Going Concern: If the buyer continues to run the business, the sale may qualify as a transfer of a going concern (TOGC), making it VAT-free.

• Asset Sales: If individual assets are sold (e.g., equipment, property), VAT may apply at the standard rate (20%).

• Opting to Tax: If the business includes commercial property, you may need to consider the option to tax rules.

How to Handle VAT:

• Confirm whether your sale qualifies as a TOGC with HMRC or a tax advisor.

• Ensure all VAT records are accurate and up-to-date.

• Clearly outline VAT responsibilities in the sale agreement to avoid disputes.

5. The Importance of Working with a Tax Advisor

Navigating the tax implications of selling your business can be complex, and mistakes can be costly. A qualified tax advisor can help you:

• Identify all applicable taxes and reliefs.

• Structure the sale to minimise your tax liability.

• Ensure compliance with HMRC regulations.

• Plan for future tax obligations, such as IHT.

Investing in professional advice can save you significant time, stress, and money in the long run.

Plan Ahead to Maximise Your Proceeds

Selling your business is a life-changing event, and understanding the tax implications is essential to achieving a successful outcome. By addressing Capital Gains Tax, exploring Business Asset Disposal Relief, planning for Inheritance Tax, and considering VAT, you can minimise your tax burden and retain more of your hard-earned proceeds. Don’t leave your financial future to chance. Start planning today to ensure a smooth and tax-efficient exit.

Are you planning to sell your business and want to maximise your proceeds? Contact our team of expert tax advisors today for a free consultation. We’ll help you navigate the complexities of UK tax laws and ensure you keep more of your sale proceeds. Click here to schedule your call now!