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A Guide To Taxes On Selling A Business

A Guide to Taxes on Selling a Business

Do you plan to sell your business? Understanding how taxes work on the sale of a business is crucial. This guide provides an overview of the different taxes associated with business sales and a detailed step-by-step guide to selling a business. It also contains useful strategies to reduce or minimise tax liabilities. 

Taxes To Be Aware Of For Business Sales

The following are the common taxes to understand before deciding to sell a business.

  • Capital Gains Tax: as a business owner who has managed a business for more than 12 months, you are required to pay capital gains tax for any profit made when you decide to sell. While capital tax is paid on any increase in the value of the business, it also depends on your marginal tax rate. When you decide to sell a business, the tax is calculated on the difference between the sales price and the original purchase or setup price. 
  • Inheritance Tax – this type of tax applies to the sale of a business that is a part of your estate. Inheritance taxes are payable on the sale proceeds and depend on the value of your estate and if reliefs or exemptions are available. The amount of tax paid is calculated at a rate of 40% on the excess value of the business above the inheritance tax threshold.
  • Stamp Duty Tax: refers to tax levied on the sale of a business that includes commercial premises. Stamp duty tax is calculated based on the selling price and depends on the value of the property and its location.
  • Value-Added Tax: this tax is calculated on the sale of shares for the business sold if it is a company. Alternatively, VAT is paid on the sales of the trade and assets that form a part or whole percentage of the business.

There are other taxes to be aware of when selling a business. They include the income tax and National Insurance Contributions. You can refer to the GOV.UK website for the thresholds that determine the specific tax rates you will pay. It is also essential to seek legal advice on how to minimise your tax liability when selling a business in the UK.

Capital Gains Tax On Business Sale

The capital gains tax (CGT) is an important tax return to understand when planning to sell a business. CGT is payable on only the profit of the business sale of assets that exceed the allowance threshold.

You should note the following:

  • The assets can include land and buildings, fittings, plant and machinery, shares, registered trademarks and the business reputation.
  • The capital gains tax is practically required from self-employed people, sole traders or members of a business partnership. Other organisations like limited companies pay Corporation Tax on profits made from selling their business assets.
  • You are only liable to pay capital gains tax on the total profit that exceeds the annual CGT allowance threshold of £12,300.

Therefore, you need to calculate your profits to determine if you are liable for capital gains tax. The amount you pay depends on your total profits but there are different reliefs and exemptions available to reduce or minimise your CGT liability. We also advise you to seek professional advice to ensure full compliance with necessary tax regulations.

Inheritance Tax On Business Sale

The inheritance tax allowance threshold for everyone is £325,000 and you become liable to pay on the excess sales value of the estate at a rate of 40%. However, there is the option to use a business property relief to reduce the value of the business asset if it is a part of the estate. It is an effective strategy to minimise your inheritance tax liability.

Stamp Duty Land Tax On Business Sale

Stamp duty land tax is the tax payable on the sales of a business that includes commercial promises. The amount paid depends on the value of the property and whether it is in England or Wales. However, the cost falls on the interested buyer and not the seller.

The buyer of the business is liable to pay Stamp Duty Land Tax on increasing portions of the property price over £150,000 for non-residential or mixed-use land. A rate of 2% is then charged on excess sales amount between £150,001 – £250,000. Similarly, 5% is the tax rate in proportion to the property price over £250,000.

Value Added Tax On Business Sale

The calculation of the amount of value-added tax on a business sale depends on the following:

  • Share sale (in the case of a company),
  • Selling of trade and assets of the business (some or all business parts).

Standard VAT rates apply to the sale of any VAT-registered business. However, there are exemptions when no VAT is charged especially when only a portion of the assets of a running business is sold. There might be no recorded supply for VAT purposes and we term such transfer of business ownership as a going concern (TOGC). Check here for more information.

Reducing Tax Liabilities

Business Asset Disposal Relief

The Business Asset Disposal Relief was originally called the Entrepreneur’s Relief before 6th April 2022. It is a relief eligible to sole traders or business partners who have managed a business for a minimum of two years and want to sell or close the business.

Eligibility for this relief grants you the right to claim a tax-free allowance and pay a 10% tax on the other profits of the business sale. However, certain conditions must be met such as making a profit of £1 million or less from the sales of your business assets. Any profit that exceeds the stated threshold is taxed at 20%.

Since 6th April 2020, the conditions to become eligible have changed. You must prove that you own shares or assets in the business for a minimum of 12 months before selling. It is also mandatory to be an officer or employee of the company. Claims on the business asset disposal relief are made through the self-assessment tax returns before the 31st January deadline in the tax year following the year the business was sold.

Report Your Losses

It is necessary to report losses on business sales since it reduces the total taxable profits. You might also be eligible for a tax-free allowance for capital gains tax if the profit exceeds the threshold. That helps to deduct unused losses from previous tax years or to move them forward.

However, it is important to note that you can only offset losses against profits of the same type. Losses on the sale of shares can only be offset against future gains on shares and not those on sales of property.

Business Property Relief

Business owners planning to sell a business that includes commercial premises should consider taking advantage of the Business Property Relief. It helps to minimise the amount of inheritance tax payable on the sale of the business.

The eligibility criteria for this relief is having a property where business was done for a minimum of two years. You can submit a claim for the relief through your self-assessment tax returns or by filing in section B of the Business Property Relief help sheet. The deadline for laying claims is 31st January in the tax year following the year that the business was sold.

The current modifications to the business property relief regulations explain it is available at 50% for all property types. That includes any property used for business or trade and others categorised under unlisted shares and interests in unquoted trading companies.

Structure Of Sale

Another way to reduce the amount of tax owed is to structure the sale of your business as an asset rather than a share. Proceeds from selling shares are taxed as income at your marginal rate. While the proceeds from selling the assets of a business are taxed as capital gains. This opens up the opportunity to lower tax bills as capital gains tax instead of income tax.

Other Tax Reliefs

Check out the other tax reliefs available depending on the type of business you are selling.

  • Agricultural Property Relief: it is available to farmers and owners of agricultural land interested in selling their businesses. The eligibility criteria is if that property served agricultural purposes for a minimum of two years. 
  • Enterprise Investment Scheme Relief: it is available to investors with investments in certain company types who are willing to sell some of their shares.
  • Patent Box Relief: eligible to owners of companies with patents developed by them and who are willing to sell some of their shares.

Understand that we have other tax relief types not mentioned in this guide. You should contact a qualified accountant or tax advisor if you need additional information on your own eligibility for tax relief and tax liabilities.

Selling A Business Step-by-Step

Selling a business is a complex process that requires careful planning. There are numerous factors to consider such as the terms of the sale or tax payment calculations. You need to decide if you want to sell the business as a going concern or if you are actually closing it down.

Here are simple steps to successfully sell a business:

  • Assess the value of your business: consider employing a professional business valuer if you need an accurate valuation of the business. The valuation must account for tangible assets like land and machinery to turnover. It should also cover the more difficult assets such as market conditions, customer base, trademarks and reputation, and products and services.
  • Find the right buyer: every buyer has a different perception so choosing the best depends on factors like their financial capacity and strategic plans for the business to know if they share the same vision.

You can start sourcing for buyers within your professional networks or outsource the advertising to a broker or blind advertising company. It is always best to market the company discreetly so that its sales do not affect business relationships with customers and suppliers.

  • Negotiate the sales price and terms: the negotiation process is sometimes time-consuming and complex. Think about hiring an experienced solicitor or broker to get the best deal.
  • Close the deal: carefully close the deal once you agree on the selling price and terms with the buyer. That includes signing a contract that transfers the business ownership. You might contact a professional legal representative to oversee the handoff and ensure everything goes well.
  • Pay any taxes due: ensure you include plans to calculate the taxes when selling a business. That starts with understanding how to maintain updated and accurate tax records. You should also consider hiring an accountant to find new ways to reduce your tax liabilities and meet payment deadlines.
  • Tell staff about the sale: endeavour to let your employees know about the possible sale of the business. Informing them early is crucial to allow them to plan their future. It is also an excellent idea to meet with all staff to discuss the sale and answer questions they might have. We also advise you to conduct proper research on the correct redundancy or TUPE procedures for when your employees remain in the business after the sale.

Summary

Selling a business is a big decision that requires time, careful planning and a proper understanding of tax implications. You must understand how to calculate taxes on the profits of the business and appropriate tax-free amounts.

Otherwise, have a professional tax advisor to do the calculations so you don’t pay the wrong amounts. A qualified account or tax advisor can also check your eligibility for certain tax reduction schemes to minimise unexpected tax bills. The common taxes involved with business sales are the capital gains tax, stamp duty tax, inheritance tax and value-added tax.

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