Selling a business is a huge endeavour. And so it should be. After investing countless hours into building your business, you want to ensure a smooth and successful transition throughout this final phase of your business journey. However, many people overlook the tax implications of selling their businesses. They either sell to the highest bidder or facilitate an internal sale without considering the tax implications and how this will affect their profits!
So, to help you navigate the sales process (and make the biggest profit), we will talk you through four different approaches to selling your business and how they will affect your taxes.
1. Capital Gains Tax (CGT)
Capital Gains Tax (CGT) works by taxing business sellers on the profits they have made selling their business/assets. The standard rate of CGT is 20%. So, for example, if you bought a share for £200 and sold it for £500, you would be required to pay 20% tax on the £300 profit you made.
But when is this applicable?
CGT applies if you’re a sole trader or partnership selling part or all of your business or business assets. Depending on your business, you may have to pay CGT on shares, land, machinery and other valuable assets. It also applies if you are the shareholder of a company and you are selling your shares.
You are allowed up to £12,300 in tax-free capital gains. So, the tax implications of a trade sale can vary drastically based on your business’s size, assets and value.
2. Business Asset Disposal Relief (BADR)
Business Asset Disposal Relief (BADR) (what used to be called Entrepreneur’s Relief) offers a reduced rate of Capital Gains Tax (10%) on the first £1m of value for eligible sellers.
But how do you know if you’re eligible?
Your accountant will be able to identify whether you’re eligible for this tax relief. But as a general rule of thumb, if you’re selling part or all of your business, you must:
- Be a sole trader or business partner
- Have owned the business for at least two years
Alternatively, if you’re selling shares, you must be an employee or office holder and hold at least 5% of the trading company’s shares for at least 24 months.
If you fulfil the eligibility criteria, you only have to pay 10% on capital gains (up to your first £1 million in profits). So check your BADR eligibility before selling – you could halve your Capital Gain Tax!
3. Management Buyout (MBO)
Management Buyout is when the company owner sells all (or a large part) of the company’s shareholding to its current managers.
Now, much like a trade sale, you still have to pay 20% CGT (unless you are eligible for relief). However, unlike a trade sale, the funding for a management buyout is much more complex. Often management cannot afford to buy out the shareholding alone. So they have to combine personal and external assets with loans and equity.
However, the benefit of an MBO is that it creates a much smoother transition for employees, they’re relatively quick and easy to arrange, and they have a very high success rate.
4. Employee Ownership Trust (EOT)
Similarly to an MBO, buyers can also sell their shares to an Employee Ownership Trust (EOT). But what’s the difference? The difference with this government-led initiative is that the previous owner can sell their shares without paying tax on any capital gains!
Obviously, this is a huge incentive for sellers, but there are criteria you must fulfill to reap such rewards. Some of the requirements are:
- Your shares must be from a trading company.
- The EOT must acquire over 50% of the company’s shares.
- All employees must receive equal benefits from the EOT.
- Shareholders with more than a 5% stake in the business can only make 2/5ths of the company’s employees.
- The 0% tax benefit only exists for the first sale. If you choose to sell more shares at a later date, you will not be exempt from CGT.
Find the right fit for your company with these tax implications in mind
As you can see, there are many ways you can sell a company. And each approach has various tax implications. So it’s important to understand how these strategies can affect your profits.
If you’re still unsure which approach is the most tax-efficient way to sell your business, we strongly recommend speaking to us as your accountants! We will be able to identify if you are eligible for any tax deductions or exemptions to help maximise your profits and minimise your liabilities.