If you’re thinking of selling your business, you’ll be keen to understand what tax will be due on the money you receive. After building your business you’ll no doubt want to ensure you see maximum benefit for the risk and hard work!
Typically there are a few factors to consider. Careful preparation before the sale can reduce any tax exposure, so its best to plan ahead if you can. Here are a few things to consider:
Method of sale/disposal
‘Selling’ a business can take many forms. There may be ‘earn out’ periods whereby you remain attached to the business for an agreed timeframe to ensure goodwill in the handover and retention of clients/contract. In a similar vein, there may be a retention period. This sees a percentage of the sale value paid at exchange of contracts and then a balancing payment made months or even years later, Typically this can be subject to factors such as client or staff retention, renewal of contracts and profits. The net result is that your tax liability will reflect the actual receipt of funds. The retention period may cover multiple tax years, potentially making the issue of tax more manageable.
Exactly what is being sold can also have a bearing. Is it purely the goodwill and company name you’re selling? Or is there an element of tangible assets being transferred to new owners? To help offset tax, some consideration can be given to R&D credits and the split of the sale relating to the physical assets, which will have had an original cost associated with them, and the slightly less tangible sales of contracts, goodwill or trade.
Selling a business is rarely a pure cash deal. It’s likely that tax will only apply on what ends up in your bank account. If you agree a deal over multiple years, made up of shares in the new, enlarged business, and some cash, your tax will obviously be reduced as you’ll only pay it on the cash element and only when that is realised.
Entrepreneurs relief and Capital Gains Tax
Entrepreneurs relief or ‘Business Asset Disposal Relief’ is a tax allowance available to qualifying business owners that build and dispose of their company. It provides a flat rate tax of 10% on all gains on qualifying assets (with a £1 million limit). If you are eligible, it reduces the amount of tax you will have to pay.
Normally, money received from the sale of a business, after costs and qualifying expenses have been deducted, will be taxed as Capital Gains. This can be as high as 28%. But again, it’s far from simple and will depend on whether you are a basic rate or higher rate tax payer. It will also make a difference as to how and when you receive the actual money.
Planning for the sale
If you’re considering a disposal, its best to seek tax advice before any discussion with a potential buyer or agent. As well as helping you plan, they can work with you to maximise the value of the business, looking at the balance sheet, value of contracts and your own earnings. It’s not unusual to find that business owners have not received a market equivalent income during the lifetime of their business. You may have even injected personal reserves and capital in to support cash flow. Therefore maximising the money you receive from the disposal of your business is not always about the final sale value. It may be that you can structure drawings through dividends and PAYE in the period leading up to disposal to make up for lost ground in the past.
To discuss any aspect of the sale of your business, please get in touch.