Guide to Capital Gains Tax in a business sale
When selling a business, understand how the transaction is taxed, including how much Capital Gains Tax you need to pay, how Capital Gains Tax is calculated and other tax considerations. When selling a business, your tax advisor or accountant will advise you on how to structure the sale of the business so that it is taxed efficiently to maximise value.
What is Capital Gains Tax?
Capital Gains Tax is a tax applied to any profit or gains made from selling a business, part of a business or a business asset by an individual. Business assets subject to Capital Gains Tax include:
- land and buildings
- fixtures and fittings
- plant and machinery
- registered trademarks
- your business’s reputation
When selling a business, calculate your Capital Gains Tax bill to forecast how much you will likely take home from the sale of the business. If you have a financial target in mind to fund your next venture, such as retirement, or reach a particular savings goal, you may price your business with this in mind. This may also shape price negotiations with potential buyers and the degree of flexibility that you exercise.
If a limited company disposes of a business or business asset, it will pay corporation tax which is a form of business tax applied to profits made by a limited company.
- Previous sales and acquisitions experience
- Sector specialisms and average success rate
- Sales value expectations and growth potential
How is Capital Gains Tax calculated when selling a business?
To calculate how much Capital Gains Tax you need to pay, work out how much profit you will make from the sale. This is the difference between how much you paid for the business or business assets, and how much they will now be sold for.
If your total taxable gains are below the annual Capital Gains Tax allowance, currently £12,300, you will not pay Capital Gains Tax.
Any costs incurred to improve the business or sell the business can be deducted from the gain. If you report a loss, this will be deducted from the gains made in the same tax year. You can also use unused losses from previous tax years to reduce your gains if you are over the annual Capital Gains allowance for the year.
There are different rules to work out Capital Gains Tax if you dispose of the business for less than it is worth, you inherited the assets and the Inheritance Tax Value is unknown, or if you owned the business before April 1982.
Taxes when selling a business
When selling a business, you may be able to pay less in Capital Gains Tax by claiming Business Asset Disposal Relief, formerly Entrepreneur’s Relief. If you qualify for Business Asset Disposal Relief, you will pay Capital Gains Tax at a flat rate of 10% on all gains. To qualify for Business Asset Disposal Relief, you must have owned the businesses for a minimum of two years.
You can claim up to £1 million in Business Asset Disposal Relief over your lifetime.
For more information on Business Asset Disposal Relief and Corporation Tax when selling a business, read our comprehensive tax on selling a business guide.