Selling a business is a milestone, but without proper planning, a large portion of your profit can be lost to tax. Understanding how to avoid tax when selling a business, the tax on selling shares, and the key differences between a share sale vs an asset sale will help you keep more of what you’ve built. The way your deal is structured plays a major role in determining your final tax bill, so getting it right from the start is essential.
Understanding the Tax Implications on Selling a Business
The profit you earn from selling a company is typically taxed as a capital gain, meaning that you will pay taxes on the profit you have made, not the actual amount that you received when selling the business. The profit you make is calculated as the difference between the amount of money you invested in buying your business and the proceeds from the sale of your business.
Depending on how you sell your business, you may be subject to additional taxes (capital gains tax) than you would if you sold the shares of the corporation that owns the assets in question. How you structure the sale will affect not only your tax liability but also your risk, as well as your legal obligations as a seller and the attractiveness of your business to buyers. For these reasons, tax planning should never be an afterthought.
Share Sale vs Asset Sale: Why Structure Matters
What Is a Share Sale?
Selling your share in the company means transferring your ownership to another person. The buyer will own everything that belongs to the company, including its assets, liabilities, contracts and historical operations. Generally, from the seller’s perspective, this option is the easiest and most tax-efficient. Typically, when you sell shares in an active company, any proceeds from the sale of those shares will be subject to capital gains tax. If you qualify for capital gains tax reliefs, such as business asset disposal relief, it can dramatically reduce your tax liability when selling your shares. Most business owners prefer to sell through a share purchase agreement if they have the opportunity to do so.
What Is an Asset Sale?
Unlike a stock or other securities sale, an asset sale involves selling different pieces of your business separately, e.g., selling equipment, stock, intellectual property, and goodwill. When assets are sold, the business will first receive the funds from the transaction instead of you personally. As such, there are increased tax implications related to asset sales.
Since Corporation Tax will be paid by the business on profits generated through the transaction before any distribution occurs, you are at risk of needing to pay additional personal tax on any distributions. Many sellers do not prefer this method due to the complexities associated with it, though many buyers do prefer using this method because it reduces their risk of incurring subsequent liabilities.
| Aspect | Share Sale | Asset Sale |
|---|---|---|
| Seller Tax | CGT (potentially 10% with BADR) | Corporation Tax + dividend/CGT (double tax) |
| Buyer Appeal | Lower (takes on all liabilities) | Higher (cherry-picks, no old debts) |
| Speed & Simplicity | Faster – one transfer | Slower – individual asset transfers |
| Liabilities | All pass to buyer | Mostly left behind |
| Stamp Duty | Buyer pays 0.5% on shares | SDLT on property (higher) |
Tax on Selling Shares: What You Need to Know
If you sell the shares in your company, any profit from the sale will likely be considered Capital Gains and subject to Capital Gains Tax on any profit you make. Typically, the Capital Gains Tax rate is lower than the typical rate of income tax, which means that selling the shares in your company will hopefully improve your personal finances overall.
The Business Asset Disposal Relief (BADR) may also be available to you, which means you may qualify for the lowest rate of tax on the profit on the sale of the shares, depending on whether you meet the eligibility criteria. One of the best ways to pay no tax legally when you leave a business is to utilise BADR to your advantage.
How to Avoid Tax When Selling a Business Legally
Planning Your Exit Early
Discover how to reduce tax liability from selling a business by planning for your exit strategy early. Waiting until a deal is on the table will limit how you can plan for that sale. Planning can help you structure your business differently so that you take advantage of all available reliefs and reduce any taxes motivated by ownership.
Choosing the Right Sale Structure
Choosing how to sell a business is very important. Most of the time, if you are selling a business through a share sale, you will pay less tax on the total sale of the business because share sales incur double taxation, and you can take advantage of CGT reliefs. However, every situation is different, so planning a sale will depend upon the structure of your business, what type of buyer you will have and what your long-term plans are.
Making Use of Tax Reliefs
Tax reliefs can be extremely valuable when selling a business. For example, if your business is eligible for Business Asset Disposal Relief, you will be able to greatly reduce any tax liability you have on your business sale. Ensuring that you check if you qualify for these schemes will help you benefit from the relief you can claim.
Using Family Tax Planning
Another way of saving on tax is to transfer shares to your spouse before their sale, allowing both parties to utilise their allowance, which may help reduce the total amount of tax to be paid. This is a common approach used by many and will often reduce the total taxable amount payable.
Considering Alternative Exit Routes
Another option for selling your business would be through an Employee Ownership Trust (EOT). Depending on the conditions of selling your business through an Employee Ownership Trust (EOT), you may qualify for significant tax savings, including possibly not having to pay any Capital Gains Tax. This option will not be available to every business selling, but you may want to consider it as part of your succession planning strategy.
How Reflex Accounting Will Support You
Selling a business involves complex decisions, especially when it comes to managing the tax implications on selling a business. Reflex Accounting provides expert guidance to help you structure your sale efficiently, reduce liabilities, and maximise your final returns. With a proactive and tailored approach, they ensure you make informed decisions at every stage of the process.
- Smart Tax Planning: Helps you plan to reduce unnecessary tax and avoid last-minute issues.
- Right Sale Structure: Advises whether a share sale or an asset sale is more beneficial for your situation.
- Tax Efficiency: Works to minimise the tax on selling shares by applying relevant reliefs and strategies.
- Personalised Advice: Provides tailored solutions based on your business and financial goals.
- End-to-End Support: Guides you through the entire process to ensure a smooth and compliant transaction.
With Reflex Accounting, you gain clarity, confidence, and a structured approach to selling your business while keeping more of your hard-earned profit. For personalised advice on selling your business and reducing tax, please contact Reflex Accounting today on +44 121 262 1528 or email info@reflexaccounting.co.uk.
FAQs:
Do sellers pay Capital Gains Tax on a share sale?
Yes, in most cases, sellers pay Capital Gains Tax on the profit made from selling their shares. The tax is applied to the gain, not the full amount received, which often makes it more tax-efficient than other structures.
Why do buyers sometimes prefer an asset sale?
Buyers often prefer asset sales because they can select only the assets they want and avoid inheriting existing liabilities, debts, or risks tied to the company. This gives them more control and reduces potential exposure.
Can Business Asset Disposal Relief apply to share sales?
Yes, Business Asset Disposal Relief can apply to share sales if specific conditions are met, such as ownership period and involvement in the business. It can significantly reduce the Capital Gains Tax rate, making it a valuable relief for sellers.
Does VAT apply when selling a business through an asset sale?
VAT may apply to certain assets in an asset sale. However, if the sale qualifies as a Transfer of a Going Concern (TOGC), VAT is usually not charged, provided all conditions are satisfied
