Tax considerations when selling a business

A “capital gain” occurs whenever shares are sold for more than the price that was paid for them. Quite literally, the “capital” (equity in business) has “gained” in value (share price). These gains (the profit made, or difference between the price you paid for your shares and the price you sold them at) are subject to Capital Gains Tax (CGT).

The amount of CGT you pay will depend on whether you are able to utilise any tax reliefs, such as Business Asset Disposal Relief (BADR) and holdover relief (the two main tax breaks available for CGT).

If the qualifying conditions for BADR are met, CGT will be charged at 10% on the first £1 million of gains you realise during your lifetime. Any gains above the £1 million threshold are taxed at the standard CGT rate of 20%.

It’s important to note that BADR is only available to individuals who have met certain qualifying conditions for at least 2 years ending on the date of disposal.

If you give away your business, as can often be the case when a business passes down through the family, holdover relief may be available. Holdover relief ensures no capital gain arises on the disposal, and the individual receiving the shares is deemed to acquire them at a price equal to that which the transferor initially paid for them. Therefore, when the individual receiving the shares subsequently disposes of them, they will pay CGT on any gain attributed to the combined period of ownership.

An intuitive way to think about holdover relief is to think of CGT as being “held over” until a sale. If you are giving away your business then you are not realising the gain in value of your capital. You are effectively passing those gains on to the business’s new owner, so they will pay tax on them if and when those gains are realised.

The sale of your business will also require you to consider your Inheritance Tax position. In most cases the company shares will qualify for relief from Inheritance Tax. Should you sell your shares you are replacing those relief qualifying shares with cash that does not attract any relief from Inheritance Tax, thereby increasing your overall Inheritance Tax exposure.

If you are thinking about selling shares in your business, then it is essential you speak to a tax specialist first.  At JW Hinks, our team of tax experts can ensure that you minimise your tax liabilities and maximise the sale proceeds retained. Call us on 0121 456 0190 to learn more.