Expert Explains Why Tax Planning Is Important When Selling Your Business

27th March 2024

Holly Bedford, K3 Tax Advisory Managing Director explains why tax planning is so important when selling your business.

Holly is a transaction tax specialist advising on corporate sales and acquisitions, MBOs, group reconstructions, private equity-backed corporate finance investments and sales to EOTs. With 30 years' tax experience, her in-depth knowledge and understanding of the wider commercial and personal aspects of such transactions makes her one of the most respected tax advisers in this field.

When the time comes to sell your business, what is the single biggest cost that will eat into your proceeds? Yes, of course, it's tax.

Whilst Capital Gains Tax (‘CGT') is the most common tax paid on a business sale, you need to consider other taxes such as Corporation Tax, Income Tax and Inheritance Tax.

Which taxes will apply to your sale will depend on several factors, including the type of business you are selling and the way in which your sale is structured.

Don't worry, though. Relief is available. There is the potential to reduce your Capital Gains Tax liabilities with Business Asset Disposal Relief or to defer or extinguish your capital gains with deferral relief and reinvestment relief. Tax planning can reduce or remove the other taxes you may pay.

We recommend you seek professional, expert advice to make sure you use all the reliefs you can and not fall into the traps that can increase your tax bill.

But in terms of making sure you are fully prepared for the tax considerations that inevitably must be factored into your business sale, which measures should you take?

Here are four tips

1 Plan ahead

A tax review before the sale goes ahead can identify any tax risks and tax planning opportunities.

Pre-sale restructuring could mean less of your sale proceeds ends up being lost in tax; or if you only want to sell part of your corporate group, or assets need to be extracted before the sale, a demerger process can remove the considerable tax costs which otherwise arise.

2 Refine your exit strategy

The best time to structure for a tax-efficient business exit is before the sale is being negotiated. Advice may be needed on removing tax obstacles to a successful future disposal and to provide the widest range of sale opportunities in the future.

3 Align the business sale with your family objectives

Passing a family-owned business to the next generation can trigger prohibitive tax costs without careful planning, but transactions can be structured to protect asset value and allow founder family members to realise their value in a tax-efficient way, while allowing the next generation to continue the business without needing to personally fund the transfer.

The same can be achieved if your management team want to take over the business.

4 Consider plans for the sale proceeds

In a sale of your business, you should consider yours and your family's cash needs and if you have cash to invest, plan accordingly. You can reduce or remove your tax liability by reinvesting in tax-efficient investments, and you can look to reduce potential future Inheritance Tax liabilities by considering gifts or trusts.

Now let's take a look at some of the specific tax considerations that can be relevant to a company sale:

Capital Gains Tax (CGT)

You will pay CGT if you make a gain when selling your company shares or other assets such as land and property or intellectual property. CGT is applied only to the gain you make and not the total amount received.

Corporation Tax

If you own shares in a limited company but are selling the business as a trade and asset sale, rather than a share sale, the company will pay Corporation Tax on the profits it makes on selling the trade and assets. You would pay further tax if you then take the proceeds out of the company. In some cases, tax planning can remove this double tax cost.

Inheritance Tax

If you have net taxable assets of more than £325,000 when you die, your estate will be subject to Inheritance Tax (‘IHT') at 40% of the excess. Trading businesses are usually not included as taxable assets and so business owners have more to think about when it comes to IHT planning, especially if you have a mixture of business and investment assets.

Mixing business and investment assets in a company can mean the whole value is protected from IHT, or it could mean the whole value becomes subject to IHT depending on the balance of the assets, which can change over time. Careful ongoing planning can therefore have a significant impact on your IHT position.

Your retirement plans or plans to sell the business could also have a significant impact on your IHT position, so IHT planning is crucial after a sale.

Implications of receiving shares or loan notes as proceeds

As part of your sale, you may be offered new shares or loan notes as part of your proceeds. Receiving shares or loan notes can allow you to defer some of your CGT liability and with shares, potentially continue to qualify for relief from Inheritance Tax. However, receiving shares may not be suitable in all cases and could lead to higher tax costs overall if tax rates increase.

Whether it is a full or partial business sale you wish to pursue, there are tax consequences to consider and identifying your goals will provide you with a structured approach.

There are reliefs available to mitigate your CGT liability on a business sale:

Business Asset Disposal Relief (‘BADR')

BADR (formerly known as Entrepreneur's Relief) reduces the rate of CGT on the first £1million of qualifying lifetime gains to 10%. You are usually required to have owned your business for over two years and with a company, hold 5% of the shares and be employed for two years.

Deferral Relief/Reinvestment Relief

When selling your business or disposing of an asset, you usually pay CGT for the tax year in which the transaction takes place.

However, if you reinvest your sale proceeds into shares that qualify for the Enterprise Investment Scheme (‘EIS’) you can defer your tax until you dispose of the EIS shares in future.

If you reinvest into shares that qualify for the Seed Enterprise Investment Scheme (‘SEIS’), you can permanently extinguish up to 50% of the chargeable gain arising from the sale of your business up to £100,000.

You can also claim income tax relief for 30% of amounts invested into EIS shares and 50% of the amounts invested into SEIS shares.

EIS and SEIS investments are both specialist areas of tax and financial planning and can be high risk, so you should seek specialist advice before investing.

If you sell business assets you held personally and reinvest in new business assets, you may be able to claim rollover relief so that some or all of your taxable gains are deferred.

If you need advice about the tax implications of your business sale, or more general tax guidance, K3 Tax Advisory , a sister company of KBS Corporate , boasts a team of skilled tax specialists who can work alongside you and offer any support you require.