When you make the decision to step away from your business your main priority is likely to sell for as high a price as possible. This makes sense, but it’s important to recognise that agreeing on the price is only half the battle – you also need a plan to extract the profit.
Without one, you may find that years of hard work lining up a buyer is ruined by a large, unexpected tax bill.
However, with a little help and a little planning, you can successfully minimise this impact and sell your business in the most tax-efficient way. What this looks like will vary depending on your business, but here are some of the options you should be aware of.
The ways in which you can sell a business are numerous and each comes with different tax implications. One common type of tax you may come across is Capital Gains Tax (CGT), which you incur as a result of selling an asset.
Ordinarily, CGT is taxed at two levels, 10% and 20%, depending on whether you’re on a higher or lower rate of income tax. You also have a tax-free allowance of £12,000.
Many business owners fall in the higher band of CGT, and therefore expect a tax bill of 20%, but this can be halved if you qualify for entrepreneurs’ relief, allowing the sale of up to £10 million of assets at only a 10% CGT rate.
Following the 2018 Autumn Budget, the qualifying criteria have changed slightly and are now as follows:
- The entrepreneur must own shares in a trading company or be a sole trader or business partner.
- The entrepreneur has been at the company as an employee or office holder for two years.
- The entrepreneur must be beneficially entitled to 5% of the company’s distributable profits.
- The entrepreneur must be entitled to 5% of profits assets available on winding up the company.
Selling Shares, Not Assets
How you sell your business will have a sizeable impact on how much tax you pay, depending on whether you choose to sell shares or assets.
Ofter, a buyer will wish to buy assets, as it allows them to cherry pick what they want and avoids taking on any liabilities of the company. The result is that it is the company making the sale, meaning the money from it ends up in the company bank account.
That means the business will likely pay corporation tax on any profits from the sale, and you may have to pay income tax when you take the money out for yourself.
On the other hand, selling shares is a deal between you and the buyer, meaning the money will land in your account. You may have to pay CGT, but as we’ve already discussed, entrepreneurs’ relief can go a long way to reducing that bill.
For many business owners, even after they sell they can’t sit still and want to either launch a new business or invest in an existing one. If this is what you plan to do, then you may be able to delay paying any CGT.
To do this, you’ll need to invest in companies or social enterprises that are new or not listed on any recognised stock exchange. The schemes are:
- Enterprise Investment Scheme (EIS): EIS investment allows you to delay or reduce the CGT you would have paid on gains produced following the sale of previous assets, so long as these assets were sold no more than three years before the investment or one year after.
- Seed Enterprise Investment Scheme (SEIS): SEIS investment allows you to pay no CGT on a gain of up to £100,000 if you use the gain to buy new shares in approved, small early-stage companies.
As well as allowing you to reduce or delay paying CGT on your gains from selling your business, these schemes often provide favourable tax considerations on gains you make from your investment as well.
Of course, it’s worth drawing attention to the fact that these schemes typically only delay paying CGT. Typically, you’ll still need to pay tax when you take money out of the investment scheme.
You may also consider applying for rollover relief, which also allows you to delay paying CGT “if you sell unlisted shares to the trustees of a Share Incentive Plan (SIP) and use the proceeds to buy new assets.”
Employee Ownership Trust
If you’ve built a strong team over the years and would rather they took responsibility for the business, you can sell to an employee ownership trust (EOT). This has a couple of advantages, including not having to find a buyer, though it arguably involves a bit more paperwork.
The major benefit, though, is that selling to an EOT can claim a full exemption from capital gains tax.
However, if you want to sell to an EOT, you’ll find that you won’t get the full value of your shares upfront. Instead, you’ll receive a smaller upfront payment, with the rest coming in instalments, funded by the profits of the company.
So, if you’d rather be paid in full or you’re concerned the company wouldn’t make the required profits to pay you, selling to an EOT may not be right for you.
If you’d rather take the opposite approach to an EOT, you could consider simply winding up your business.
This can work nicely if it’s just you, allowing you to transfer assets and money into your name. You’ll still need to pay income tax, but if you pay yourself in dividends, you can keep this tax to 7.5%.
Of course, if you have employees, winding up the company would put them out of a job, so you’d likely have significant redundancy costs.
There are many options for selling your business in the most tax-efficient way. What’s clear, though, is that the basis of how and who you sell to defines how much you can expect to reduce your tax bill by.
Of course, every business is different, and therefore needs a different strategy for its sale. The only way to truly understand how to reduce the tax implications of selling a business is to seek expert advice specific to you.
To truly understand how to sell your business in a tax-efficient way, get in touch with our team to learn more.