Understanding Capital Gains Tax, Business Asset Disposal Relief and Corporation Tax as a business seller
When selling a business, you will need to understand your tax liabilities as this will influence the sale price, your gains from the sale of your business and your tax position when selling a business in the future. Appointing a reputable business transfer agent or business broker can help you understand tax on the sale of a limited company and how you can maximise financial value when sealing the deal.
There are annual and lifetime allowances you will need to take note of as this will directly impact your appetite to sell a business and buy a business in the future. Selling a business tax comprises Capital Gains Tax (CGT), Business Asset Disposal Relief (BADR) and possibly Corporation Tax.
If you fail to acknowledge the tax implications, you could make costly decisions and drive down profits from the sale of your business. The Selling My Business team will help sell your business and answer - how can I calculate Capital Gains Tax on the sale of my business?
How much tax will I pay on the sale of my business?
The tax you pay when you sell your business will depend on your operating style and the sale structure - whether you sell all your business through an asset sale, or part of your business through a share sale.
If you are a limited company, you will likely need to pay Capital Gains Tax and Corporation Tax on the profit you make from selling your business. Should you be a sole trader or operate a business partnership, you will need to pay Capital Gains Tax (CGT) upon the sale. You may be able to claim Business Asset Disposal Relief, which will reduce tax on gains.
Tax on the sale of a business is a complex topic that will be simplified by your business transfer agent and accountant alike.
- Previous sales and acquisitions experience
- Sector specialisms and average success rate
- Sales value expectations and growth potential
Capital Gains Tax when selling a business
When selling a business, business sellers often question if they need to pay tax, how much tax they will need to pay and how to calculate tax on the sale of a limited company. To work out your tax liabilities, you need to understand Capital Gains Tax.
Capital Gains Tax is the tax applied on the profits made from selling your business, not the total amount received from the sale. For example, if you sell your florist business for £350,000, whereas you acquired it for £230,000 a decade ago, the total gain will be £120,000. Therefore, Capital Gains Tax will apply to the £120,000 gain, i.e. the amount your business increased in value since you purchased it.
The annual exemption for Capital Gains Tax for the tax year 2021/22 is £12,300. Gains made under the tax-free allowance will not be subject to Capital Gains Tax.
When selling your business, you may qualify for tax relief through Business Asset Disposal Relief.
What is Business Asset Disposal Relief, formerly Entrepreneurs’ Relief?
You may be able to claim Business Asset Disposal Relief, formerly known as Entrepreneurs’ Relief until 2020, which could reduce tax on gains when disposing of your business. If eligible, BADR could reduce the rate of Capital Gains Tax to 10% when selling your business.
You will only be able to claim Business Asset Disposal Relief for gains up to £1 million throughout your lifetime. Gains made beyond this limit will be subject to the standard rate of Capital Gains Tax which will depend on your tax bracket. To qualify, you must have owned your business for 2 years before selling it and further conditions may apply.
Do I need to pay Corporation Tax when selling a business?
If you operate as a limited company and you wish to sell company assets as part of the business sale, you may also be subject to Corporation Tax on chargeable gains.
Exactly how your tax situation will be affected will depend on various factors such as how much you make from the sale, whether you are eligible for certain tax relief schemes, and the structure of your business. If you cannot claim Business Asset Disposal Relief, you may be able to benefit from alternative tax relief measures, such as Business Asset Rollover Relief or Incorporation Relief.
This can be an extremely complex area; therefore, you should always seek professional advice regarding your tax position prior to putting your business up for sale. Planning ahead may also end up saving you a substantial amount on your tax bill.
The Selling My Business team of business brokers will work closely with your accountant to work out your capital gains tax liability through a business sale tax calculator and answer if you can claim business asset disposal relief.
For more information, get in touch with our leading business transfer agents, business brokers and business valuers for your company valuation, free consultation and to find out how much tax to pay when you sell your business.