What tax do you pay when selling a business?
When selling a business, you’ll typically need to pay Capital Gains Tax or Corporation Tax on the profits, which will usually form the majority of your tax bill. Understand the different taxes you may need to pay, how to calculate your tax liabilities and how this will impact the profits generated from the sale of your business.
There are ways to maximise tax efficiency and reduce your tax bill through tax reliefs and tax-free allowances.
To expertly guide you through the tax implications of selling a business, seek professional advice from an accountant and speak with a reputable business transfer agent.
Tax implications of selling a business
When selling a business, you’ll need to be aware of Capital Gains Tax, Corporation Tax, and Business Asset Disposal Relief, as they will determine your tax liability. By estimating your tax liability, you can plan your finances accurately. A reputable business transfer agent can arrange the valuation of your company, which will determine your sale price and form the basis of your tax calculations.
We look at Capital Gains Tax, Corporation Tax and Business Asset Disposal Relief – the key taxes when selling a business.
Capital Gains Tax – As a sole trader or a business partner, you will pay Capital Gains Tax on the gains generated from selling your business. If you are a limited company and sell your business through a share sale, you will pay Capital Gains Tax. Gains are classed as the profit made from selling your business, rather than the overall income generated.
There are key differences between a sole trader and a limited company. As a sole trader, there is no legal distinction between the individual and business, whereas, as a limited company, there is a legal separation between the individual and the limited company.
Read our dedicated Capital Gains Tax guide to understand how much Capital Gains Tax you must pay when selling a business.
Corporation Tax – If you are a limited company and you sell the trade and assets, you will pay Corporation Tax, and then Capital Gains Tax when closing the company.
The main rate of Corporation Tax at 25% will apply to profits over £250,000.
The small profits rate of Corporation Tax at 19% will apply to profits below £50,000.
Business Asset Disposal Relief – If eligible for Business Asset Disposal Relief, formerly Entrepreneurs’ Relief, you will pay Capital Gains Tax at a reduced rate - see our Capital Gains Tax guide for more information. You can claim Business Asset Disposal Relief up to a lifetime limit of £1 million. If you exceed the lifetime limit, you must pay Capital Gains Tax at the standard rate based on your income.
How much tax you pay on the sale of your business will ultimately be determined by the structure of your business sale, such as an asset sale or share sale. An asset sale is when a buyer purchases selected company assets, and a share sale is when a buyer purchases the whole company, including company assets and liabilities.
- Previous sales and acquisitions experience
- Sector specialisms and average success rate
- Sales value expectations and growth potential
How can I reduce tax when selling a business?
When selling your business, it’s crucial to understand the tax-free allowances and lifetime limits available that can reduce your tax liability. Your Capital Gains Tax annual exempt allowance means gains generated from selling your business will be tax-free, up to a limit. Business Asset Disposal Relief also reduces your Capital Gains Tax liability, if eligible.
To qualify for Business Asset Disposal Relief, you must have owned your business for 2 years, and further conditions may apply, as explained in our Capital Gains Tax guide which also provides a breakdown of Capital Gains Tax and Business Asset Disposal Relief rates.
When planning the sale of your business, seek expert guidance from a professional accountant on structuring the sale of your business tax-efficiently.
How can we help?
The Selling My Business team of business transfer agents will work closely with your accountant to facilitate a seamless and efficient business sale. For more information on selling your business or arranging a company valuation, get in touch with our leading team of business transfer agents. We offer a free confidential consultation to help you sell your business with confidence and provide clarity on your tax position.
