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Selling a business can be complex and stressful, especially when you try to understand the tax implications. You must be aware of your tax liabilities. Planning ahead is a good idea to ensure you are prepared and avoid surprises. This article will explain the tax implications of selling your business in an asset sale.
Tax and Your Business’s Structure
The amount of tax you owe and how you will pay it is affected by the structure of your business. The following table demonstrates how your business’s structure can affect the type of tax you pay upon sale.
| Company Structure | Tax Implications |
| Sole Trader | If you operate as a sole trader, you must pay capital gains tax on your profit when you sell your business. |
| Partnership | Similarly to the sole trader structure, if your business is a partnership, you must also pay capital gains tax on the profit made when you sell. |
| Limited Company | If you operate your business as a limited company, you will need to pay corporation tax on any profits made from the sale of your business. |
Capital Gains Tax
You may need to pay capital gains tax (CGT) on the profits made from selling or disposing of all or part of a business asset. You can calculate what you owe based on the difference between the amount you paid for the asset and the amount you sold it for.
For example, if you initially bought your business for £100,000 and then sold it for £250,000, the difference is £150,000. This means you have ‘gained’ £150,000 in profit. Higher-rate earners pay CGT at a rate of 20% of this amount, so £30,000 in this case. Alternatively, if you sold a business asset for a loss, you will use the asset’s market value at the time of sale to calculate the amount of CGT you owe. Your tax will also depend on any allowances and reliefs you claim.
There are also forms of tax relief available. One form of tax relief is Business Asset Disposal Relief (BADR), previously known as entrepreneurs’ relief. This lifetime relief limit of £1 million is available under particular circumstances. To qualify for relief, both of the following must apply for at least two years up to the date you sell your business:
- you are a sole trader or business partner; and
- you have owned the business for at least two years.
BADR can reduce the capital gains tax you will pay to 10% on all gains on qualifying assets. Alternatively, you may be eligible to delay paying CGT.
Be aware that different rules apply to selling intangible assets, such as intellectual property and goodwill. The amount of tax you pay can depend on the date you acquired them.
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Corporation Tax
In the same fashion as capital gains tax, corporation tax is based on the profit you make from selling your business assets. If your business is a limited company, you will likely be required to pay corporation tax.
You need to work out how much you owe based on the profits you made following the sale of your business. The exact amount you pay will depend on the amount of profit generated from the sale and whether relief is available to you.
Selling your business involves a number of moving parts. This fact sheet will provide an overview of the sale of business process and
the documents you need to make an effective sale.
Similar to CGT, there are different rules for paying corporation tax on the sale of intangible assets.
Advice on Selling Your Business
Selling a business is a significant decision. It is not only a good idea to seek professional advice when deciding to sell your business, but it may be crucial to help you navigate the sale and the tax landscape. Experienced lawyers and accountants can guide you through the process so you can make informed decisions. Professional legal and financial advice will also help you to ensure compliance.
Key Takeaways
When selling your business, you need to understand the associated tax implications. All business owners must stay compliant with tax regulations. You may be required to pay capital gains tax or corporation tax, depending on your circumstances. The amount of tax you owe depends on your specific circumstances and can vary based on many factors, these include:
- your level of income;
- the amount of money you make from selling your business;
- your business’s structure; and
- your eligibility for tax relief.
It is essential to seek professional advice to ensure you know your tax liabilities and navigate the sale process. If you would like legal guidance selling your business, LegalVision’s experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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