Tax Considerations When Selling a Business in the UK

Selling a business is a major milestone for any entrepreneur. Whether you’re stepping away to retire, pursue new ventures, or capitalise on your hard work, understanding the tax implications, including the need to understand capital gains tax, can make a significant difference to the final amount you retain. From how the deal is structured to the reliefs available, tax planning plays a central role in a successful business sale.

This guide covers the essential tax considerations when selling a business in the UK.

1. Introduction to Business Sales

When considering selling a business, it’s essential to understand the tax implications involved. As a business owner, you may need to pay capital gains tax, corporation tax, or other taxes, depending on your business structure and the sale process. Business Asset Disposal Relief (BADR) and other tax reliefs can help minimise your tax liability. In this section, we’ll introduce the key concepts and considerations for business sales, including the importance of seeking professional advice from a qualified accountant or tax advisor.

Selling a business is a significant decision that requires careful planning and understanding of various tax obligations. Whether you are a sole trader, a partner in a business partnership, or the owner of a limited company, the taxes you pay can vary significantly. For instance, you might need to pay capital gains tax on the profit from the sale, or corporation tax if your business is a limited company. Additionally, certain tax relief schemes like Business Asset Disposal Relief can substantially reduce your tax liability, making it crucial to understand these options.

2. Asset Sale vs. Share Sale

One of the most important early decisions is whether to structure the deal as an asset sale or a share sale. This has significant consequences for both tax exposure and risk allocation.

Asset Sale

In an asset sale, you (or your company) sell specific business assets—such as property, equipment, stock, goodwill, and company assets—to the buyer. Ownership of the company itself does not transfer. Selling assets can trigger tax liabilities such as Corporation Tax and Capital Gains Tax.

Possible tax implications:

• A gain realised on asset disposal may be subject to Corporation Tax at the company level.

• If you then extract proceeds from the company (e.g., via dividends or liquidation), additional Income Tax or Capital Gains Tax may apply.

• This can result in double taxation: once at the company level and again at the individual level.

Asset sales are often favoured by buyers due to the ability to “cherry-pick” assets and avoid historical liabilities.

Share Sale

In a share sale, the buyer purchases shares in the company, taking over ownership of the entire business—including its assets and liabilities.

Tax implications:

• Gains on the sale of shares are typically subject to Capital Gains Tax.

• Share sales can qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), potentially reducing CGT to 10% on qualifying gains. Eligible entrepreneurs may qualify for Business Asset Disposal Relief, which can significantly reduce their Capital Gains Tax liabilities.

• Generally more tax-efficient for sellers, with no double taxation.

While share sales are cleaner from the seller’s perspective, buyers may require warranties and indemnities to mitigate inherited risks.

3. Business Structure and Tax Implications

The tax implications of selling a business vary depending on the business structure. Sole traders, partnerships, and limited companies have different tax obligations. For example, sole traders and partnerships are personally responsible for paying capital gains tax, while limited companies pay corporation tax on their profits. Understanding your business structure and its tax implications is crucial to minimise your tax liability. In this section, we’ll explore the different business structures and their tax implications, including the potential for business asset disposal relief and other tax reliefs.

The structure of your business plays a pivotal role in determining your tax obligations when you sell. Sole traders and some business partnerships may be directly liable for capital gains tax on the profits from the sale of business assets. This means that the gain is added to your personal income, and you pay tax based on your overall income tax rate. On the other hand, limited companies are subject to corporation tax on their profits, which can be more tax-efficient in certain scenarios.

For sole traders and partnerships, Business Asset Disposal Relief can significantly reduce the capital gains tax rate to 10% on qualifying gains, up to a lifetime limit. Limited companies, however, may benefit from different reliefs and allowances, such as the ability to offset losses against profits. Understanding these nuances is essential to effectively manage your tax liabilities and take full advantage of available tax reliefs.

4. VAT (Value Added Tax)

VAT considerations vary depending on whether the sale is structured as a share sale or an asset sale.

• Share Sale: The sale of shares is usually exempt from VAT.

• Asset Sale: The sale of business assets could be subject to VAT. However, if the sale qualifies as a Transfer of a Going Concern (TOGC), it may be outside the scope of VAT altogether.

To qualify for TOGC status:

• The business must be a going concern at the time of sale.

• The buyer must intend to carry on the same kind of business.

• Both parties must be VAT-registered if the business was VAT-registered.

As mentioned, it’s crucial to seek legal and tax advice during deal structuring.

5. Capital Gains Tax (CGT)

CGT is a core consideration when selling a business, particularly in a share sale. The gain you make on the sale is calculated by subtracting the base cost of your shares from the sale price, minus allowable expenses (e.g. legal fees). Understanding tax relief options is crucial for small business owners to maximise their financial benefits and navigate the complexities of capital gains tax.

Key points:

• Rates: CGT is charged at 10% or 20%, depending on whether you are a basic or higher-rate taxpayer.

• Annual exemption: In 2024/25, the first £3,000 of gains is tax-free.

• Allowable deductions: Costs related to the acquisition, improvement, or sale of the shares or assets can be deducted from your gain.

Proper documentation of acquisition costs and professional fees can help reduce your taxable gain significantly.

6. Business Asset Disposal Relief (BADR)

BADR is one of the most valuable tax reliefs available to business owners. If you qualify, you may pay only 10% CGT on gains up to a lifetime limit of £1 million. Additionally, Business Asset Rollover Relief can help delay Capital Gains Tax payments when reinvesting in new qualifying assets.

Eligibility criteria:

• You must be a sole trader, business partner, or shareholder in a personal company.

• You must have held the business (or shares) for at least two years.

• For limited companies, you must own at least 5% of the shares and be an employee or officer.

This relief is subject to change, and its future availability is politically sensitive. It’s important to review current rules before planning your exit.

7. Asset Rollover Relief and Tax Deferral

Asset Rollover Relief allows you to defer paying capital gains tax when you sell a business asset and reinvest the proceeds in a new asset. This relief can help you preserve your profits and grow your new business without immediate tax liabilities. In this section, we’ll explain the rules and eligibility criteria for Asset Rollover Relief, including the time limits for reinvesting the proceeds and the types of assets that qualify.

Asset Rollover Relief is a valuable tool for business owners looking to reinvest in new assets without the immediate burden of capital gains tax. When you sell a business asset and use the proceeds to purchase a new qualifying asset, you me be able to defer the capital gains tax on the original sale. This deferral allows you to reinvest the full amount of your proceeds, fostering business growth and expansion.

To qualify for Asset Rollover Relief, the new asset must be purchased within a specific time frame, typically within three years of selling the original asset. The types of assets that qualify for this relief may include land, buildings, and fixed plant and machinery used in your business.

8. Further Considerations

Employee Ownership Trusts (EOTs)

An increasingly popular route for owners looking to exit tax-efficiently while preserving the company culture. If conditions are met, selling to an EOT can result in no CGT liability.

Stamp Duty

• Stamp Duty at 0.5% applies to the sale of shares.

• Asset sales generally do not attract Stamp Duty, though property and leasehold transfers may be subject to Stamp Duty Land Tax (SDLT).

Tax on Deferred Consideration

If part of the sale proceeds are contingent (e.g. through earn-outs), the tax treatment can become complex, particularly if payment is made in future years or via non-cash consideration.

Non-UK Residency

If you’re not a UK resident at the time of sale, different CGT rules may apply, but gains on UK businesses can still be within the scope of UK tax under certain circumstances.

9. Common Tax Mistakes to Avoid

When selling a business, it’s easy to make tax mistakes that can result in unnecessary tax liabilities. Common mistakes include failing to claim business asset disposal relief, not keeping accurate records, and misunderstanding the tax implications of different business structures. In this section, we’ll highlight the most common tax mistakes to avoid and provide tips on how to minimize your tax liability, including seeking professional advice from a qualified accountant or tax advisor.

Selling a business involves numerous tax considerations, and even small mistakes can lead to significant tax liabilities. One common error is failing to claim Business Asset Disposal Relief, which can reduce the capital gains tax rate to 10% on qualifying gains. Another frequent mistake is inadequate record-keeping, which can complicate the calculation of your taxable gain and result in higher taxes.

Misunderstanding the tax implications of your business structure is another pitfall. For example, sole traders and partnerships face different tax obligations compared to limited companies, and not recognizing these differences can lead to unexpected tax bills. To avoid these mistakes, it’s crucial to maintain accurate records, understand your tax obligations, and seek professional advice from a qualified accountant or tax advisor. By doing so, you can minimize your tax liability and ensure a smoother, more tax-efficient business sale.

10. Practical Advice for Sellers

Early tax planning is essential. Here are practical steps to help ensure a smooth and tax-efficient sale:

• Engage advisors early: A corporate solicitor and tax advisor can help structure the deal to maximise reliefs and minimise liabilities.

• Review your shareholding: Ensure you meet all qualifying conditions for BADR if applicable.

• Prepare for due diligence: Clean, well-documented accounts and contracts will reduce deal friction and may improve your valuation.

• Negotiate sale terms carefully: Warranties, indemnities, and the method of consideration (cash, shares, earn-outs) all have tax consequences. The amount of tax you will pay depends on various factors such as the structure of the business and profit margins.

• Post-sale planning: Consider the tax treatment of how you’ll invest or use sale proceeds. Trusts, pensions, and investment vehicles can be used to defer or mitigate further tax.

Final Thoughts

Selling a business is as much about strategy as it is about numbers. The right legal and tax advice can transform your outcome, unlocking reliefs and avoiding costly pitfalls. Whether you’re selling shares or assets, understanding the UK tax implications of selling a business is vital for achieving a successful exit. Understanding your tax position is crucial as it can influence sale strategies, pricing, and overall financial outcomes.

For personalised advice on selling your business tax-efficiently, speak to one of our specialist business sale solicitors today.