Selling Your Business? The Tax Advisory Perspective

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Selling Your Business? The Tax Advisory Perspective

The decision to sell your business is both exciting and daunting. It marks the culmination of years of hard work, but it also comes with a host of considerations, especially when it comes to tax. Whether you’re a small business owner looking to retire, an entrepreneur moving on to your next venture, or a shareholder seeking to divest, understanding the tax implications is crucial.

This blog will guide you through the essentials of selling a business, focusing on the tax obligations you’ll face, the benefits and 'planning steps' we can help you leverage, and the steps you should take to maximise your returns while staying compliant. And, as you’ll see, partnering with a specialist firm like ASWATAX ensures that the process is as smooth, efficient, and profitable as possible.

Key Tax Implications When Selling a Business

1. Capital Gains Tax (CGT)

When selling your business, the biggest tax consideration is often Capital Gains Tax (CGT). Simply put, CGT is charged on the profit you make from selling (or ‘disposing of’) your business. It’s the difference between the selling price and the original cost of your shares or assets.

For small business owners in the UK, there are a couple of CGT reliefs you might be eligible for, which could significantly reduce your tax bill:

• Business Asset Disposal Relief (formerly known as Entrepreneurs' Relief): This relief allows you to pay a lower CGT rate of 10% on up to £1 million of lifetime gains, assuming certain conditions are met.
• Gift Relief: This allows you to defer CGT when transferring business assets as a gift, though the new owner assumes responsibility for the tax when they later sell the asset.

Navigating these reliefs can be tricky, especially when you add other factors like the timing of the sale and whether the sale is structured as an asset or share sale (more on that later). It’s vital to get professional advice early to understand which reliefs you qualify for and how to make the most of them.

2. Entrepreneurs’ Relief (Business Asset Disposal Relief)

If you’re eligible for Business Asset Disposal Relief, you can benefit from a lower tax rate when selling all or part of your business. Instead of paying the full CGT rate (which could be as high as 20%), you’d only pay 10% on qualifying gains, up to a lifetime limit of £1 million.

However, there are specific conditions:

• You must be a sole trader, business partner, or hold at least 5% of the company’s shares.
• You must have owned the business or shares for at least two years.
• The business must be a trading company (or the shares must be in a trading company).

Missing one of these conditions could disqualify you from the relief, resulting in a significantly higher tax bill. ASWATAX can help ensure that you structure the sale of your business in a way that maximises your eligibility for this valuable relief.

3. The Timing of the Sale

When it comes to tax, timing can make a substantial difference. For instance, selling your business at the start of a new tax year rather than the end could delay when you have to pay your CGT. Similarly, it may allow you to spread the proceeds over two tax years, reducing the amount of tax you owe overall.

Professional advisors can assist you in considering timing strategies for the sale. With our deep knowledge of UK tax legislation, we help clients avoid the pitfalls of poor timing while ensuring they don’t miss out on tax-saving opportunities.

Structuring the Sale: Asset Sale vs. Share Sale

One of the most critical decisions you’ll make when selling your business is whether to structure the sale as an asset sale or a share sale. Each approach has different tax implications, both for the seller and the buyer, and the structure you choose can significantly affect your post-sale tax liability.

1. Asset Sale

In an asset sale, you sell the individual assets of the business, such as its property, equipment, stock, and goodwill. The business entity remains, but it holds fewer (or no) assets after the sale.

For sellers, the proceeds from each asset sold are subject to CGT. Different assets can attract different tax treatments, adding a layer of complexity. Moreover, there might be Corporation Tax implications if the business has sold intangible assets, like intellectual property or goodwill.

While an asset sale offers more flexibility in terms of what’s sold, it’s often less tax-efficient for the seller compared to a share sale. Saying that, we can help you weigh the pros and cons, work through the scenarios and 'cost out', ensuring you understand the full tax implications before proceeding.

2. Share Sale

A share sale, on the other hand, involves selling your ownership stake (shares) in the business. This is often more straightforward for the seller, as it typically means you only have to deal with CGT on the gain made from selling your shares.

From a tax perspective, a share sale is generally more beneficial to the seller, especially if they qualify for Business Asset Disposal Relief. Share sales can be highly advantageous if you're looking to fully exit the business with a clean break, as the buyer assumes full ownership of the business entity, including all its assets and liabilities.

At ASWATAX, we can help you understand which sale structure is better suited to your situation, factoring in the business’s value, your personal tax position, and the buyer’s preferences. More importantly, we ensure you stay compliant with HMRC while minimising your tax liability.

Tax Advantages of Employee Ownership Trusts

One of the most attractive aspects of selling to an EOT is the potential tax benefits it offers to business owners. When a business owner sells a controlling interest in their company to an EOT, they may be able to do so free of Capital Gains Tax. This can represent a significant financial advantage compared to other methods of selling a business. For the employees, any bonuses received under an EOT can also be free from Income Tax up to a certain limit, making it a win-win situation.

FULL RELIEF AGAINST CAPITAL GAINS TAX

The sale of a controlling interest in a business to an employee ownership trust (EOT) will be entirely free from capital gains tax.

Post-Sale Considerations

1. Deferring Payments

Sometimes, buyers may propose an earn-out agreement, where part of the payment is deferred and based on the business’s future performance. While this can help maximise the sale price, it complicates the tax position because CGT is typically due when the sale is completed, even if you haven’t received all the proceeds yet.

There are ways to structure earn-outs to defer CGT, but they require careful planning. With our guidance, you can structure your sale to defer tax and ensure that the payment timeline works in your favour.

2. Investing Proceeds Tax-Efficiently

Once you’ve sold your business, attention turns to what to do with the proceeds. If you don’t plan carefully, you could face further tax liabilities on any returns you make from investing the funds.

Options like Enterprise Investment Schemes (EIS), Venture Capital Trusts (VCTs), or using a Family Investment Company (FIC) can help you shelter the sale proceeds from further tax. ASWATAX specialises in structuring tax-efficient investment vehicles and can work with you to create a strategy that meets your long-term goals while minimising tax exposure.

3. Succession Planning

If the sale of your business is part of a wider succession plan, there are other considerations to keep in mind. For example, passing on business assets to family members can trigger both CGT and inheritance tax (IHT) liabilities, depending on how the transfer is structured.

However, careful planning and the right use of reliefs (such as Holdover Relief and Business Relief) can reduce or eliminate these tax liabilities. We have deep expertise in inheritance tax planning and business succession, ensuring that your family business continues smoothly with minimal tax impact.

Moving from an inheritance tax friendly asset (shares in a trading company) to an unfriendly asset (cash) means IHT must NOT be forgotten. There are many strategies we explore for our clients to ensure the best possible outcome.

Why Choose ASWATAX?

Selling a business is one of the most significant life and financial decisions you’ll ever make, and it pays to have expert and might I add, dynamic guidance.

As a young and dynamic team operating with a proactive approach, we pride ourselves on providing tailored tax advice to business owners, ensuring that every sale is structured to maximise value while minimising tax liabilities and risk.

Our approach combines deep expertise in tax law with a personalised service, walking you through every step of the process. From initial planning to post-sale tax strategies, we’re here to make sure you come out on top.

If you’re considering selling your business, don’t leave your tax planning to chance. Speak to our specialist team at ASWATAX today, and let’s ensure that your hard-earned success is rewarded in the most tax-efficient way possible.

And trust me, it's regularly done!

By understanding the tax implications of selling your business and working with ASWATAX, you can confidently take the next step in your journey through life, knowing that your financial future is secure. I hate to end like this, but proper advice also means no opportunities missed, or worse, ‘regrets’.