How to sell a business tax efficiently
Selling a business is a significant financial event, and optimizing for tax efficiency can help maximize your profits. Whether you’re selling a small business, a franchise, or a larger enterprise, understanding tax rules and leveraging relief options is critical. Proper planning can reduce tax liabilities and increase the net proceeds from the sale.
In this guide, we’ll explore strategies, tax relief options, and practical tips to help you sell your business in the most tax-efficient way.
1. Understand the Tax Implications of Selling a Business
When selling a business, various tax liabilities can arise depending on the structure of the sale. The primary taxes to consider include:
- Capital Gains Tax (CGT): Applied to the profit made on the sale of assets or shares.
- Income Tax: Certain elements of the sale, like deferred payments or earn-outs, may be taxed as income.
- Value Added Tax (VAT): Depending on the sale structure, VAT may apply to certain assets or inventory.
Internal Linking: Learn more about capital gains tax implications in What is the capital gains tax for selling a business.
2. Structure the Sale Tax Efficiently
a) Asset Sale vs. Share Sale
The structure of the sale significantly impacts tax liabilities:
- Asset Sale: Involves selling individual business assets like equipment, property, or goodwill. Taxes are applied to each component separately, often resulting in higher tax liability.
- Share Sale: Selling shares of a limited company is usually more tax-efficient as it qualifies for reliefs like Business Asset Disposal Relief.
b) Deferred Payments and Earn-Outs
If the buyer cannot pay the full amount upfront, deferred payments or earn-outs can spread your tax liability over several years. This method also allows for tax relief adjustments based on future performance.
Internal Linking: Learn about deal structuring in How to structure a deal to buy a business.
3. Take Advantage of Tax Relief Options
a) Business Asset Disposal Relief (BADR)
Formerly known as Entrepreneurs’ Relief, BADR allows you to pay a reduced CGT rate of 10% on the sale of qualifying assets or shares, up to £1 million in lifetime gains. To qualify:
- You must have owned the business for at least two years.
- You must be an employee, director, or sole trader.
b) Incorporation Relief
If transferring a sole trader business to a limited company before selling, incorporation relief can defer CGT liability until the shares are sold.
c) Rollover Relief
Rollover relief allows you to defer CGT liability if you reinvest the proceeds from the sale into qualifying assets, like property or machinery, within a specified time frame.
4. Plan for VAT Considerations
If your business is VAT-registered, VAT may apply to certain assets during the sale. However, if the sale qualifies as a “transfer of a going concern” (TOGC), it may be exempt from VAT. To qualify as TOGC:
- The business must be sold as a whole entity.
- The buyer must continue operating the business.
Internal Linking: Learn more about selling assets in What documents to ask for when buying a business.
5. Optimize Personal Tax Planning
a) Maximize Pension Contributions
Consider making pension contributions from the proceeds of the sale to reduce taxable income.
b) Utilize Annual Tax-Free Allowances
Take advantage of annual tax-free allowances for CGT (£6,000 for 2023/24). If possible, time the sale to span two tax years to double the allowance.
c) Gift Assets to a Spouse or Partner
Transferring shares or assets to a spouse before the sale can double the tax-free allowance and take advantage of their lower tax rate.
6. Seek Professional Advice
Tax planning for business sales can be complex, and mistakes can be costly. Working with a tax advisor or accountant ensures you:
- Maximize available reliefs and allowances.
- Structure the sale in the most tax-efficient way.
- Avoid unexpected tax liabilities.
7. Using BusinessSeek to Sell Your Business Tax-Efficiently
BusinessSeek provides tools and resources to connect you with the right buyers while helping you streamline the selling process:
- Tailored Listings: Showcase your business to buyers looking for franchises, location-specific opportunities, or industry-specific ventures.
- Expert Guidance: Access our blog resources for tax tips and selling strategies.
- Seamless Transactions: Work with brokers and accountants through our platform to ensure a tax-efficient sale.
Internal Linking: Visit how to list your business for sale for more information.
8. Common Mistakes to Avoid
a) Not Planning for Tax Early
Start planning for tax efficiency well before listing your business. Last-minute planning can result in missed opportunities for relief.
b) Neglecting Asset Valuations
Ensure all assets are accurately valued to avoid disputes or overpaying taxes.
c) Ignoring Legal Compliance
Failing to comply with VAT, CGT, or other tax laws can result in penalties and delays.
Internal Linking: Learn about legal considerations in Do you need a solicitor to buy a business?.
Final Thoughts
Selling a business tax-efficiently requires careful planning, professional advice, and a clear understanding of available reliefs. By structuring the sale correctly and leveraging tax reliefs like Business Asset Disposal Relief, you can significantly reduce tax liability and maximize your net proceeds.
BusinessSeek simplifies the process by providing a platform to connect with buyers and resources to guide you through every step. Start your tax-efficient business sale journey today!
