It’s good to know about taxes when selling a business. The last thing a seller wants is to have their profits eaten up by a huge tax bill upon completion. Fortunately, however, there are several different options that can reduce the amount of tax you have to pay.
If you don’t know how much tax you’re likely to owe, it’s impossible to determine a fee that you’ll be happy with if you sell your business. This deduction ultimately determines how much is left over after the sale and, by extension, how much can be paid to creditors. By being familiar with all the taxes associated with selling a business, sellers can protect themselves from any complications.
Taxes on the sale of a business can be difficult to understand given their complex nature. For this reason, we always recommend seeking the advice of a professional business sales service. Still, it’s important to have a basic knowledge of what taxes you can expect to pay.
Different types of taxes when selling a business
Depending on how you sell, you may be liable to pay tax to HMRC. These typically include capital gains tax (CGT) and corporation tax.
Do I have to pay taxes when I sell my business?
yes. The type of tax you pay and the amount you pay depends on the operating structure of your business, the sales structure you choose, and whether you are entitled to tax relief.
Limited companies may have to pay both capital gains tax and corporation tax, while sole traders pay income tax instead.
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What are the main ways to sell a business?
stock sale
This is the direct transfer of shares in a business to another party. This includes all contracts, employees, and anything else related to your business.
Name, goodwill, asset sales
Here, the seller can choose to sell individual components of the company to one or more buyers. For example, you might sell a company car to one buyer and a patent to another.
merger
In a merger, your company joins with another company to form one larger business.
management buyout
A management buyout (MBO) occurs when a company’s management buys a majority stake in the business.
If I sell my business, will I be taxed on capital gains?
yes. The seller of a limited liability company is responsible for taxing capital gains when selling the business.
What is capital gains tax (CGT)?
Capital gains tax applies to the profits you make when you sell your business (capital gains). For example, if he bought a business for £400,000 and sold it for £575,000, he would only pay tax on his £175,000 gain.
Capital gains tax on asset sales
If you choose to sell your name, goodwill, or stock, you will still have to pay capital gains tax. The principle of paying tax on profits from individual assets is the same as for selling stocks. This must be based on the original purchase price, even if the asset was purchased below market value.
Capital gains taxes may apply even if you sell for less than the price. In these cases, the profit is determined by the market value of the asset, not the sale price.
You may be able to avoid capital gains tax by transferring assets to a charity, spouse, or civil partner. However, there are some subtleties to these rules. A tax liability may arise against your spouse/partner even if you did not live together with your spouse/partner during the relevant tax year, or if your spouse/partner sells assets through his or her own business. There is a gender. Similarly, complex tax issues can arise if a charity makes even a small payment to your assets.
What is corporate tax?
Similar to capital gains tax, corporate tax is a tax on profits earned. The difference between the two is that capital gains tax applies to business owners, while corporate tax applies to businesses.
Corporate tax typically applies to profits earned in a company’s day-to-day operations. It also applies to profits made from the sale of owned assets.
The corporate tax rate that a company pays is determined by the following criteria:
Do I have to pay corporation tax if I sell my business?
Only companies are liable for corporate tax; individuals are not taxed. In other words, if you sell your entire business through a stock sale, you won’t have to pay corporate tax. However, if your business sells assets or other elements of the company, the profits made therefrom will be subject to corporate tax.
As a basic rule of thumb, unless your business sells assets, you probably won’t have to pay corporation tax.
The corporate tax rates as of April 2023 are as follows.
- Businesses with annual profits of less than £50,000 – low profit margins (19%)
- Businesses with annual profits between £50,000 and £250,000 – Marginal relief rate (gradually increasing from small profit rate to main tax rate depending on annual profits).
- Companies with annual profits over £250,000 – Main rate (25%)
Leave the stress of selling your business to us.
Selling a company can be fraught with significant financial, logistical, and legal issues. With many years of experience helping directors sell their companies, we can avoid any potential pitfalls on your behalf and provide a low-stress way to sell your business. Contact us to receive free advice on whether selling your business is a viable option for you.
For free, no-obligation advice, call our team today on 0800 975 0380 or book your free consultation.
How to avoid taxes when selling a business
There’s no way to avoid taxes completely, but there are some ways you can pay less.
Gains that fall within the seller’s annual tax-exempt amount avoid capital gains tax. From 6 April 2024, the tax-free allowance has been reduced to £3,000 per tax year. Before that he was £6,000.
Basic rate taxpayers will also avoid the higher rate of corporate profits tax and instead pay 10% on their profits. A person who exceeds the basic tax rate threshold (he earns £50,270 in the 2023/2024 tax year) he is liable to pay 20%.
This 20% tax rate can be avoided if the seller is eligible for Business Asset Disposal Relief (BADR).
How to reduce your capital gains tax burden
If you incur costs in improving your business or assets ready for sale, or in the sale process itself, you may be able to deduct them from your capital gains.
Eligible costs include sales-related evaluation costs, advertising costs, acquisition costs, disposal costs, etc. Improvements made can also be deducted, unless they are simply repairs or anticipated maintenance.
You can also deduct VAT, unless the seller intends to recover it. Stamp duty and land tax can also be deducted. However, interest accrued on the loan is not deductible.
What is business asset disposal relief?
Business Asset Disposition Relief is an alternative name to Entrepreneur Relief. This scheme allows sellers to pay just 10% capital gains tax on qualified profits. Considering that someone above the basic tax rate has to pay twice as much tax as her normal tax rate, this is a considerable savings. This relief can be claimed as many times as necessary up to the £1 million threshold. This threshold was previously set at £10 million, but was lowered in March 2020.
Am I eligible for business asset disposition relief?
There are several regulations that must be complied with in order to receive business asset disposal relief. A seller can apply this relief when selling all or part of its business. It can also be applied to the sale of shares in a company if you own at least 5% of the business.
If you are selling all or part of your company, you will need to be able to prove that:
- They owned the business for at least two years before selling it.
- You have not yet exceeded your BADR allowance of £1 million.
- If the asset is sold within three years of the closure of the company to which it belonged;
If you wish to sell your shares, you must ensure that the following conditions apply at least 24 months prior to your sale:
- They own at least 5% of the business
- they were employees or officers of the company
- They are entitled to receive at least 5% of the company’s net assets and distributable profits.
- The company’s primary focus does not include non-trading activities such as investments (which may include such activities but must not exceed 20% of the company’s operations).
Even within these provisions, there are some exceptions to the rules, and anyone selling a business can seek advice from a business sales professional. They can look into the specific tax situation of your business and ensure that the relief you are entitled to is applied.
Leave the stress of sales to our professional business sales team
Understanding the taxes associated with selling a business can be difficult. It is very important for sellers to know exactly what they are getting from the sale. All numbers must be accurate. As you can see from the example above, there are several permutations that can result in you paying more taxes than necessary when selling your business.
We have helped countless companies navigate complex tax situations and company sales. By trusting us with the sale of your business, you can avoid the stress and complexity inherent in the process. Our friendly and experienced team can simplify the entire process while offering you the best prices on the market. Call us on 0800 975 0380 or email us. [email protected] To find out how we can help, contact us for a free consultation.