If you’re thinking of selling your business, one of the key questions you may ask is what tax I will pay on the money I receive? It’s a fair question too. Afterall, if you’ve been building the business for many years, you’ll want to ensure you see maximum benefit from the risk and hard work you’ve undoubtedly had to put into it.
The simple answer is there is no simple answer as there are many factors to be considered. However, careful preparation for the disposal and tax planning can mitigate the tax exposure, so its best to plan ahead if you can. Here are a few ideas and scenarios to consider:
Method of sale/disposal
‘Selling’ a business can take many forms. Rarely is it as straight forward as handing over the keys and receiving a nice fat cheque in return. 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 that sees a percentage of the sale value paid at exchange of contracts and then a balancing payment made months or even years later, subject to a number of factors such as client or staff retention, renewal of contracts, profits etc. The net result is that your tax liability will reflect the actual receipt of funds – for example this 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 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.
As noted, it’s rarely a pure cash deal and therefore tax will likely only apply on the element that does end up in your bank account. If you agree a deal over multiple years which is made up in part 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, now formally called by its less exciting name of ‘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 to qualify for this, it reduces the amount of tax you will have to pay.
Normally, the monies received from the sale of a business, after costs and qualifying expenses have been deducted, will be taxed as Capital Gains which can be as high as 28%. But again, it’s far from simple and it will depend on whether you are a basic rate or higher rate tax payer. As noted above it will also make a difference as to how and when you receive the actual monies.
Planning for the sale
If you’re considering a disposal, its best to seek tax advice in advance of any discussion with a potential buyer or agent. As well as helping you plan for the disposal, they can also work with you to maximise the value of the business, by 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 and 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 and 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.