Taxes due on selling a business
Rather a dry topic, but nonetheless an important one for business owners considering the sale of their business.
In considering the net value you will receive for your business, you will need to consider the taxes due on completing a sale.
We are often asked by sellers whether they should sell the “business assets and goodwill” or the “company shares”.
In most cases, the answer is clearly to sell the company shares.
On the sale of a company Capital Gains Tax (CGT) is due on the total consideration of the deal. Whilst CGT is normally 28% for higher rate tax payers, in most cases the owners of SME’s will be eligible for Business Asset Disposal Relief (BADR) - previously known as Entrepreneur’s Relief - bringing the CGT payable to 10% on the first £1m of the sale proceeds.
If you sell the business assets and goodwill, you will keep the company. The consideration will be additional income for the company which after costs will represent additional net profit for the company on which Corporation Tax is charged (currently 19%). You will then need to withdraw the cash from the company as personal income. If you close the company after the sale, you can still apply for BADR on the net proceeds in the company, but the difference in the overall tax paid on the consideration will be of the order of 30% versus 10% if you sell the company shares.
Some buyers may offer to buy the business assets and goodwill of the company in order to avoid the risk of taking on unknown liabilities of the company. However, there is normally minimal or no tax advantage for the buyer in acquiring the business assets and goodwill over acquiring the company shares. The risk of taking on unknown liabilities can be handled within the warranties and indemnities section of the Sale and Purchase Agreement. Therefore, we find that most buyers are amenable to acquiring the company shares.
It is always important to take professional tax advice in preparing for the sale of your business. You may need to consider for example how a property can be extracted from your company, or how to keep the proceeds of the sale out of your estate for IHT purposes. We work alongside a number of professional advisors who we would be happy to recommend, so do get in touch if you would like further advice.
Article updated 6th June 2022