Just like any other large financial transaction, selling a business is a big deal. There are taxes that you will be liable for when you sell your business, the most important of which is Capital Gains Tax (CGT). This is currently set at 20% of your gains from chargeable assets for higher and additional rate taxpayers. However, there are ways you can mitigate these rates, by using Entrepreneurs’ relief and considering the method by which you sell your business.
Share Sale or Asset Sale
When you sell a business, you have two main options to consider. You can sell the company shares, including all assets and liabilities, or you can just sell the business with its name, assets and goodwill. Usually, it is more beneficial to sell your business through a share sale rather than an asset sale. This is because with the second option, you may then need to extract the sale proceeds from the business, which may end up making you liable for a double tax charge.
Entrepreneurs’ Relief
This is a way for you to minimise your capital gains tax liabilities. Entrepreneur’s relief allows you to pay a much lower rate of CGT, lowering the rate to 10% with a lifetime limit of £1 million of gains that Entrepreneurs’ relief can be claimed upon. This figure is important to note, as it has recently been reduced from a limit of £10 million, as of 11th March 2020.
There are some qualifying conditions for Entrepreneurs’ relief, but it can usually apply to sales of any unincorporated business or a personal trading company. If you’re selling all or part of your business, you must have owned it for two years before the date of sale, and you must dispose of any remaining business assets within 3 years of the sale. If you are selling shares, you must have at least 5% of the shares in the company, and be entitled to at least 5% of any profits or assets of the company. These conditions must have applied for a period of at least 2 years before the sale date.
Other Reliefs from Capital Gains Tax
It’s not just Entrepreneurs’ relief; there are other ways you can reduce the amount of CGT you are liable for. The two main forms of this are Roll-over relief and Hold-over relief.
Roll-over relief is a way to defer the payment of CGT. To qualify for this form of relief, the gains from a sale must be reinvested in new business assets. In this case, CFT will only be applied when any of these new assets are sold.
Hold-over relief functions differently. It can only be used if you are not selling your business but giving it away. For example, if you have decided to pass your business on to your partner or children. If this is the case, hold-over relief will defer the liability for CGT. If you are passing the business to your spouse or civil partner, CGT will usually be automatically deferred, relieving you of the need for hold-over relief.
