What is the capital gains tax for selling a business?

1. What is Capital Gains Tax (CGT)?

Capital Gains Tax is a tax on the profit you make when selling an asset that has increased in value. In the context of selling a business, CGT applies to the gain you make from selling the company or its assets.

The gain is calculated as:
Sale Price – Original Purchase Price – Allowable Expenses = Taxable Gain

For example, if you purchased a business for £200,000 and sell it for £500,000, your taxable gain would be £300,000, subject to certain deductions.

Internal Linking: If you’re preparing to sell your business, check out our guide on What documents to ask for when buying a business to streamline the process.

2. How is Capital Gains Tax Calculated?

The rate of CGT you’ll pay depends on your total taxable income and the type of assets being sold.

CGT Rates for Business Sales in the UK

• Basic Rate Taxpayers (Income up to £50,270): 10% on taxable gains.
• Higher Rate Taxpayers (Income above £50,270): 20% on taxable gains.

Example Calculation

• Sale Price of the Business: £500,000
• Original Purchase Price: £200,000
• Allowable Expenses: £20,000 (e.g., legal and professional fees)

Taxable Gain = £500,000 – (£200,000 + £20,000) = £280,000

If you’re a higher rate taxpayer, CGT would be:
20% x £280,000 = £56,000

3. Reliefs and Exemptions for Reducing CGT

The UK government offers various reliefs and exemptions that can significantly reduce your CGT liability when selling a business:

a) Business Asset Disposal Relief (formerly Entrepreneur’s Relief)

Business Asset Disposal Relief allows qualifying business owners to pay a reduced CGT rate of 10% on the first £1 million of lifetime gains from selling a business or its shares.

Eligibility Criteria:

• You must have owned the business for at least 2 years.
• You must be a sole trader, business partner, or hold at least 5% of shares in the business.

Example:
If your taxable gain is £280,000 and you qualify for Business Asset Disposal Relief, you’d pay:
10% x £280,000 = £28,000

b) Rollover Relief

If you reinvest the proceeds from selling your business into purchasing a new business or assets, you may qualify for Rollover Relief. This allows you to defer CGT until the new asset is sold.

c) Annual Exempt Amount

All individuals have a tax-free allowance for capital gains, known as the Annual Exempt Amount. For the 2023/2024 tax year, this is £6,000.

4. Factors to Consider When Selling a Business

a) Selling Shares vs. Selling Assets

When selling your business, you can choose to sell:

• The entire business entity (shares)
• Specific assets of the business (assets-only sale)

The choice impacts your CGT liability. Share sales often qualify for reliefs like Business Asset Disposal Relief, while asset sales may involve multiple tax liabilities.

b) Timing of the Sale

Timing your sale strategically can help reduce CGT. For example:

• Selling the business in a year when your other taxable income is lower may result in paying a lower CGT rate.
• Taking advantage of your Annual Exempt Amount by splitting the sale over multiple tax years.

c) Professional Advice

In some cases, customers and employees may be hesitant to accept a new owner if the business’s assets are being sold separately. The change in ownership structure could lead to disruption, and relationships with customers, suppliers, and even employees might be affected.

Internal Linking: For more guidance, read our article on Do you need a solicitor to buy a business?.

5. Tax Planning Tips for Business Owners

Here are some actionable tips to reduce your CGT liability when selling a business:

• Plan Early: Start tax planning well before you decide to sell.
• Utilize Spouse Allowances: If you’re married or in a civil partnership, transferring some ownership to your spouse can double the Annual Exempt Amount.
• Maximize Rollover Relief: Consider reinvesting proceeds into qualifying assets.
• Use Pension Contributions: Reduce your taxable income by increasing pension contributions, potentially lowering your CGT rate.

6. Selling a Business with No CGT Liability

While most business sales incur CGT, certain scenarios may result in no CGT liability:

• If the business is sold at a loss, you can offset this against other capital gains.
• If the sale qualifies for special exemptions or is structured as a gift to a charity.

7. Conclusion: Be Prepared for CGT When Selling a Business

Selling a business can be a profitable venture, but it’s essential to understand and plan for the tax implications. Capital Gains Tax is a significant consideration, but with proper planning and the use of available reliefs, you can reduce your tax liability and maximize the value of your sale.

At BusinessSeek, we connect buyers and sellers with a range of business opportunities and resources. Whether you’re selling a small business, a franchise, or a high-value enterprise, our platform can guide you every step of the way.