Tax Implications for Selling a Business: The Tax Advisory Perspective

The decision to sell your business is both exciting and daunting. 

It marks the result of years of work but brings many considerations, especially regarding tax. Whether retiring, moving on, or divesting, you must understand the tax implications.

This blog guides you through selling a business, covering tax obligations, key benefits, and steps to maximise returns and stay compliant.

Partnering with a specialist like ASWATAX helps make the process smooth, efficient, and as profitable as possible.

Table of Contents

• Key Tax Implications for Selling a Business

  • 1. Capital Gains Tax (CGT)

  • 2. Entrepreneurs’ Relief (Business Asset Disposal Relief)

  • 3. The Timing of the Sale

• Structuring the Sale: Asset Sale vs. Share Sale

  • 1. Asset Sale

  • 2. Share Sale

• Post-Sale Considerations

  • 1. Deferring Payments

  • 2. Investing Proceeds Tax-Efficiently

  • 3. Succession Planning

• Why Choose ASWATAX?

Key Tax Implications for Selling a Business

1. Capital Gains Tax (CGT)

When selling your business, the biggest tax consideration is often Capital Gains Tax (CGT). Simply put, CGT is charged on the profit you make from selling (or ‘disposing of’) your business. It’s the difference between the selling price and the original cost of your shares or assets.

For small business owners in the UK, there are a couple of CGT reliefs you might be eligible for, which could significantly reduce your tax bill:

• Business Asset Disposal Relief (formerly known as Entrepreneurs' Relief): This relief allows you to pay a lower CGT rate of 10% on up to £1 million of lifetime gains, assuming certain conditions are met.

• Gift Relief: This allows you to defer CGT when transferring business assets as a gift, though the new owner assumes responsibility for the tax when they later sell the asset.
  

Navigating these reliefs can be tricky, especially when you add other factors like the timing of the sale and whether the sale is structured as an asset or share sale (more on that later). It’s vital to get professional advice early to understand which reliefs you qualify for and how to make the most of them.

2. Entrepreneurs’ Relief (Business Asset Disposal Relief)

If you’re eligible for Business Asset Disposal Relief, you can benefit from a lower tax rate when selling all or part of your business. Instead of paying the full CGT rate (which could be as high as 20%), you’d only pay 10% on qualifying gains, up to a lifetime limit of £1 million.

However, there are specific conditions:

• You must be a sole trader, or business partner, or hold at least 5% of the company’s shares.

• You must have owned the business or shares for at least two years.

• The business must be a trading company (or the shares must be in a trading company).
  

Missing one of these conditions could disqualify you from the relief, resulting in a significantly higher tax bill. ASWATAX can help ensure that you structure the sale of your business in a way that maximises your eligibility for this valuable relief.

Tax Implications for Selling a Business

3. The Timing of the Sale

When it comes to tax, timing can make a substantial difference. Selling at the start of a new tax year could delay when you need to pay your Capital Gains Tax (CGT). It may also let you spread proceeds over two tax years, reducing your overall tax liability.

Professional advisors can assist you in considering timing strategies for the sale. ASWATAX helps clients avoid poor timing and ensures they don’t miss valuable tax-saving opportunities through expert tax planning.

Structuring the Sale: Asset Sale vs. Share Sale

One of the most critical decisions you’ll make when selling your business is whether to structure the sale as an asset sale or a share sale. Each approach affects seller and buyer taxes differently, and your chosen structure can greatly impact your post-sale tax liability.

1. Asset Sale

In an asset sale, you sell the individual assets of the business, such as its property, equipment, stock, and goodwill. The business entity remains, but it holds fewer (or no) assets after the sale.

For sellers, the proceeds from each asset sold are subject to CGT. Different assets can attract different tax treatments, adding a layer of complexity. Moreover, there might be Corporation Tax implications if the business has sold intangible assets, like intellectual property or goodwill.

An asset sale offers more flexibility, but it's often less tax-efficient for the seller than a share sale. However, ASWATAX can help you weigh the pros and cons, ensuring you understand the full tax implications before proceeding.

Asset Sale vs. Share Sale

2. Share Sale

A share sale, on the other hand, involves selling your ownership stake (shares) in the business. This is often more straightforward for the seller, as it typically means you only have to deal with CGT on the gain made from selling your shares.

From a tax perspective, a share sale is generally more beneficial to the seller, especially if they qualify for Business Asset Disposal Relief. Share sales can be highly advantageous if you're looking to fully exit the business with a clean break, as the buyer assumes full ownership of the business entity, including all its assets and liabilities.

At ASWATAX, we can help you understand which sale structure is better suited to your situation, factoring in the business’s value, your personal tax position, and the buyer’s preferences. More importantly, we ensure you stay compliant with HMRC while minimising your tax liability.

Post-Sale Considerations

1. Deferring Payments

Sometimes, buyers may propose an earn-out agreement, where part of the payment is deferred and based on the business’s future performance. While this can help maximise the sale price, it complicates the tax position because CGT is typically due when the sale is completed, even if you haven’t received all the proceeds yet.

There are ways to structure earn-outs to defer CGT, but they require careful planning. With ASWATAX’s guidance, you can structure your sale to defer tax and ensure that the payment timeline works in your favour.

2. Investing Proceeds Tax-Efficiently

Once you’ve sold your business, attention turns to what to do with the proceeds. If you don’t plan carefully, you could face further tax liabilities on any returns you make from investing the funds.

Options like Enterprise Investment Schemes (EIS), Venture Capital Trusts (VCTs), or using a Family Investment Company (FIC) can help you shelter the sale proceeds from further tax. ASWATAX specialises in structuring tax-efficient investment vehicles and can work with you to create a strategy that meets your long-term goals while minimising tax exposure.

3. Succession Planning

If the sale of your business is part of a wider succession plan, there are other considerations to keep in mind. For example, passing on business assets to family members can trigger both CGT and inheritance tax (IHT) liabilities, depending on how the transfer is structured.

However, careful planning and the right use of reliefs (such as Holdover Relief and Business Relief) can reduce or eliminate these tax liabilities. ASWATAX has deep expertise in inheritance tax planning and business succession, ensuring that your family business continues smoothly with minimal tax impact.

Moving from an inheritance tax-friendly asset (shares in a trading company) to an unfriendly asset (cash) means IHT must NOT be forgotten. There are many strategies we explore for our clients to ensure the best possible outcome.

ASWATAX The Best Tax Advisors in UK

Why Choose ASWATAX?

Selling a business is one of the most significant financial decisions you’ll make, and it pays to have expert guidance. At ASWATAX, we pride ourselves on providing tailored tax advice to business owners, ensuring that every sale is structured to maximise value while minimising tax liabilities.

Our approach combines deep expertise in tax law with a personalised service, walking you through every step of the process. From initial planning to post-sale tax strategies, we’re here to make sure you come out on top.

If you’re considering selling your business, don’t leave your tax planning to chance. Speak to our specialist team at ASWATAX today, and let’s ensure that your hard-earned success is rewarded in the most tax-efficient way possible.

Meet Omar Omar is a Chartered Tax Advisor (a.k.a an expert on tax issues) and founder of ASWATAX. He regularly shares his knowledge and best advice here in his blog and on other channels such as LinkedIn. Book a call today to learn more about what Omar and ASWATAX can do for you.

*Disclaimer: ASWATAX is a firm of Chartered Tax Advisors, and we strive to provide accurate, up-to-date tax insights. Tax laws may change, so this content is for general guidance only and not a substitute for professional advice. Seek independent tax and legal counsel before making decisions. ASWATAX is not liable for any loss from reliance on this information. Use at your own risk.