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3 important tax rules that could affect you when selling your business

Selling your business can be a daunting task. From getting your business sale-ready to deciding on the right price, there is a lot to think about. One of the trickiest parts of the process is understanding your tax liabilities once the sale has been completed.

While this may not be the most exciting of subjects, it’s important to pay the correct amount of tax; otherwise, you could face costly penalties.

Read on to learn more about three tax rules that could affect you when selling your business.

1. Capital Gains Tax

You may need to pay Capital Gains Tax (CGT) when you sell your business if you are a sole trader or if you are part of a business partnership. This may apply if you are selling:

  • Shares
  • Land and buildings
  • Fixtures and fittings
  • Plant and machinery
  • Registered trademarks
  • Your business’s reputation.

CGT is only charged on the profit you make from the sale, rather than the entire sum you sell your business for. So, if you bought your business for £200,000 10 years ago and you sell it for £600,000 today, you have made a profit of £400,000. It is this figure that could be liable for CGT.

Any fees you paid when you bought and sold the business can be subtracted from the total profit, reducing the amount that is liable for CGT. In addition, you have an annual exempt amount for CGT. In the 2023/24 tax year, the annual exempt amount is £6,000; it will decrease to £3,000 in 2024/25. You only need to pay CGT on any profit that exceeds this amount. 

The rate of CGT that you pay is dependent on your marginal rate of Income Tax. If your combined taxable income and gains place you within the basic-rate tax bracket, you will pay 10% CGT on your gains. If they place you in a higher tax bracket, the rate increases to 20%. 

2. Business Asset Disposal Relief

Business Asset Disposal Relief (BADR) was previously named “Entrepreneurs’ Relief”. If you’re eligible, this could cap the rate of CGT you pay on the sale of your business or business assets at 10%.

Over your lifetime, you can claim a maximum of £1 million in BADR.

To be eligible for the relief, you need to have owned the business or been part of the business partnership for at least two years prior to selling. The relief isn’t available on property portfolios that are held within a company, so if you’re a portfolio landlord, for example, you wouldn’t be eligible.

If you are eligible, you can either claim relief in your self-assessment tax return or by completing Section A of the Business Asset Disposal Relief help sheet on the government website.

Because of the timescales involved in BADR, advanced planning can be important. Working with a financial planner could help you understand how you could benefit from this and other smart planning moves.

3. Corporation Tax

If your business is a limited company, the profits you make from selling it may be liable for Corporation Tax. 

Corporation Tax is payable on the profit you make from the sale, rather than the full amount you sell the business for. You can discover the chargeable gain by subtracting the amount you originally paid for the business, as well as any relevant fees, from the total sale price.

If you bought your business before December 2017, you’ll need to use a formula known as the Indexation Allowance to work out what it would have cost you today, factoring in inflation. 

Once you have worked out your chargeable gain, include it in the Company Tax Return that you submit to HMRC to find out how much Corporation Tax you owe.

A specialist financial planner can help you to make sense of your tax liabilities

The tax implications of selling your business can be complex, and there are lots of different factors that can influence how much you owe. 

As a business owner, the sale could also affect your personal taxes, too. This is where working with a specialist financial planner can be helpful.

When you work with a financial planner who has experience supporting business owners, they can help you make the most suitable financial decisions for you and your business. Moreover, their advice can enable you to make decisions today that help you to achieve your goals in the future. 

Get in touch

If you’re a business owner and you’d like support in achieving your long-term financial goals, we can help. We’re specialists in helping business owners just like you to take the next step towards their dream future.

Say hello to us at [email protected], call us on 0161 541 2826, or submit a contact form on our website. 

Please note

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.