Selling a business, like other corporate finance transactions, is a big deal. But for many entrepreneurs, relief at the successful conclusion to years of hard work can be tempered by the reality of a substantial tax bill.
Effective tax planning can use Entrepreneurs' relief, roll-over relief or hold-over relief to minimise or defer capital gains tax liabilities. In addition, you may be able to structure a sale in a way that minimises overall tax liabilities.
Entrepreneurs' relief can allow you to pay a lower rate of capital gains tax (CGT) when you sell your business. If Entrepreneurs' relief applies, the rate of CGT is reduced to 10%. Individuals have a lifetime limit of £1 million (reduced from £10 million on 11 March 2020) of gains for which Entrepreneurs' relief can be claimed.
Entrepreneurs' relief can apply to sales of unincorporated businesses or personal trading companies - provided qualifying conditions are met. Given the substantial tax savings involved, it is vital that you organise your business and its sale so that you qualify for Entrepreneurs' relief.
Find out how to put your business on the market and what to expect during the sale process with our comprehensive guide to selling a business.
Other CGT reliefs
Roll-over relief allows CGT to be deferred if the gains are reinvested in new business assets. Provided roll-over relief applies, CGT will only become payable when these new assets are sold. A similar relief is available if gains are invested in unquoted shares that qualify under the Enterprise Investment Scheme.
Hold-over relief can be used to defer CGT if you are giving away your business rather than selling it - for example, handing your business on to your children. CGT is generally automatically deferred on any transfer of assets to your spouse or civil partner.
If you need to incorporate your business as part of the sale process - for example, if you are going to float on AIM or the Main Market of the London Stock Exchange - any capital gains made at the time of forming the company will normally be deferred automatically by incorporation relief. You become liable for CGT when you sell your shares.
Corporation tax and business sales
If you trade as a company, additional tax planning complications can arise on any business sale. While you might simply sell your shares - and claim Entrepreneurs' relief if available - there are other options.
For example, the company might sell assets, using the gains to fund additional pension contributions or dividends for your benefit. Chargeable gains from the asset sale are likely to be liable to corporation tax (though any amounts reinvested in other assets may qualify for roll-over relief).
If you are selling only part of a business, you'll need to consider whether to structure the sale as a transfer of assets or of shares. Special corporation tax treatment applies if a trading company sells shares in another trading company in which it holds a substantial shareholding.
Business sale tax planning
Long-term planning in advance can be an important element of any eventual business sale. Along with tax planning opportunities, you'll also want to look at how you ‘groom' the business for sale, maximising its likely sale value.
Some of the more substantial options to reduce tax liabilities are only available if you plan well in advance: for example, if you are considering emigrating to avoid UK capital gains tax.
Nearer the time, you'll also need to take into consideration any purchaser's preferences and tax position. For example, a purchaser may prefer to acquire assets rather than buying a company and taking on its liabilities. The structuring of any corporate finance transaction should aim to optimise the overall tax treatment, with the relative tax benefits to seller and purchaser reflected in the price.
You should take advice to help ensure that Entrepreneurs' relief is available to you and that any business sale is as tax effective as possible.