When selling a business, it is important to understand any and all tax implications that may apply as well as some which may well not apply in some cases. Without thorough knowledge of these implications, you could be at risk of steep charges or even unknown costs, which can cause considerable financial strain.
Being well informed about the taxes surrounding this process is important for both sellers and buyers. When going through this process, it is therefore important to seek the help of experienced business professionals, who know the ins and outs of selling a business and therefore how to properly prepare for this transaction and all that will follow.
How to Prepare to Sell a Business in the UK
After years of hard work and dedication, selling a business can be an exciting and rewarding time. However, it is important to properly prepare for this transaction well in advance of the sale. Through preparation, you can help to ensure that the transaction goes through as smoothly and efficiently as possible; getting the most from your sale and reaping the benefits of the hard work that has led up to this moment.
Sellers must ensure that they have had enough time to implement tax strategies in preparation of the sale. Such strategies should minimise the tax penalties applied during the transaction. Not only can this help with the tax implications of the sale, but can also promote the business to buyers as a tax efficient, which can be a very attractive offer when buying a business. However, always seek professional advice and consider speaking to your business accountant before seeking anything with any tax implications.
Seeking the help from professionals who are experienced in this area is advisable, as they can help to make sure the business implements an effective strategy.
Capital Gains Tax When Selling a Business
One of the most significant tax liabilities experienced when selling a business is Capital Gains Tax (or CGT). Capital Gains Tax is the tax that is applied to the profit that is made when selling a business. The gov.uk website defines Capital Gains Tax as:
“A tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value. It’s the gain you make that’s taxed, not the amount of money you receive.”
Those who are selling their business may be encouraged to apply for Entrepreneurs’ relief in order to reduce the CGT. Entrepreneurs’ Relief will mean that a seller pays 10% tax on the gains of “qualifying assets”.
Am I Eligible for Entrepreneurs’ Relief?
For those selling a part (or all) of their business, you must be a business partner or a sole trader, and have been in this position for 2 years or more up to the date of the sale. You must also have owned your business for a minimum of 2 years. For those selling shares or their business, you must be an employee of the company and have been so for 2 years or more up to the date of the sale. Office holders are also eligible for this, provided they too have held this position for 2 years or more up to the date of the sale. Additionally, the company’s main activities have to be in trading, or the holding company for this type of business.
If a company’s main activity ceases to be trading, those mentioned above may still be eligible for Entrepreneurs’ Relief, however they will be required to sell their shares within a period of 3 years. Alongside Entrepreneurs’ Relief, those selling their company can also apply for roll-over and hold-over relief to help defer and minimise their liability for CGT.
When Can I Apply for Rollover Relief?
You can apply for rollover relief when you intend to replace the business asset being sold with another.
For example, a business selling a factory and replacing it with a new one can apply for rollover relief. When applying for rollover relief, you must purchase the other asset (for example, the new factory) within three years of applying for the relief. Once purchased, the gain that is used in the new purchase is rolled over into the replacement asset’s base cost.
When Can I Apply for Hold-Over Relief?
Hold-over relief is another type of relief for capital gains. Also called “gift relief”, hold-over relief is available to:
- Business partners
- Sole traders
- Those with a minimum of 5% voting rights in the company
Those eligible for hold-over relief must either give these assets away or sell them for under the price that they are worth. Whilst you will not be required to pay CGT on assets that are given away, tax may still be applicable when selling the asset for under the price that they are worth, or if any gain is made from what the seller originally paid.