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How Do Taxes Affect the Sale of a Business?

Self-employed workers and sole traders in the UK often find selling a business to be an exciting milestone. Whether you’re retiring, moving onto a new venture, or simply looking to cash in on your hard work, it’s crucial to comprehend the tax implications associated with this sale.

In this article, we will guide you through the taxes you may be responsible for when selling a business in the UK, along with potential tax relief opportunities.

The primary tax you must grasp when selling your business is Capital Gains Tax (CGT):

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What is Capital Gains Tax?

When you sell your business, you may need to pay Capital Gains Tax on any profit you make from the sale. The CGT rate typically depends on your overall income and the profit you earn from the sale. For the 2023/2024 tax year, basic rate taxpayers pay 10%, while higher and additional rate taxpayers pay 20%. In the UK, you must pay Capital Gains Tax through HMRC’s ‘real-time’ Capital Gains Tax service or via Self Assessment at the end of the tax year.

The good news is that Capital Gains Tax calculates only the profit (gains) from selling your business, rather than the sale amount.

Furthermore, sole traders and entrepreneurs have more good news! The UK offers Business Asset Disposal Relief, which reduces the CGT rate to a flat 10% on the first £1 million of qualifying gains. We will explore this relief later in the article, along with other potential tax relief options.

What are the tax implications of earn-out arrangements?

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When you sell your business, you often receive part of the payment through an earn-out arrangement, which involves receiving additional payments based on the business’s post-sale performance. However, earn-outs can affect your tax position, and HMRC has specific rules that govern them. Future performance-related amounts may be subject to different tax treatment, so consult a professional tax advisor to effectively structure your earn-out agreement.

Leveraging Capital Gains Tax allowances and reliefs

Business Asset Disposal Relief can significantly reduce CGT for sole traders and business partners selling their businesses, provided they meet certain criteria. Still, this relief comes with limitations, including a £1 million lifetime limit for qualifying gains. Consult your accountant or tax advisor to determine your eligibility.

Delay tax payments on the sale with Business Asset Rollover Relief

If you plan to reinvest your business sale proceeds in a new business asset, Business Asset Rollover Relief can help defer CGT payment on your gain if reinvested within specified timeframes. Seek guidance from an accountant or tax advisor to ensure you meet the necessary conditions.

Incorporation Relief and Gift Hold-Over Relief Incorporation

gift hold over relief

Relief applies when transferring business assets to a new company in exchange for shares, allowing you to delay CGT. Additionally, Gift Hold-Over Relief may apply when giving away or selling business assets or shares for less than their value.

Timing your sale strategically

Plan your business sale several years in advance to streamline the process and maximize profits. Spreading the sale across multiple tax years can help you make better use of your annual CGT allowance, which for the 2023/2024 tax year is £12,300.

Preparation is key

Selling a business can be both daunting and exciting, but understanding the tax implications is vital. Seek professional advice from a qualified accountant or tax advisor before making any decisions about the sale. They will guide you, assess your eligibility for allowances like Business Asset Disposal Relief, and help manage your tax obligations.

At Count, we understand the challenges faced by sole traders and small business owners. Our expert accountants support you through every business stage, from startup to sale. With the right advice and planning, you can confidently sell your business and embrace new opportunities.

If you’re contemplating selling your business, consult a professional to make the most of this exciting next chapter.

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