What are the tax implications of selling a business in the UK?

What is a limited company?

A limited company (LC) is a broad term for a business where an owner's liability is limited to the amount they invested or guaranteed the company.

So, it is a separate entity from the business owner.

An LC can be private or public. Private limited companies are typically small businesses, while public limited companies are usually large firms that trade on a stock exchange.

People starting new businesses often choose to open a limited company.

As the company is a separate entity, the owner will not be liable for the firm's debts if it goes under.

Being a limited company also means you may be entitled to tax advantages.

Aside from limited companies, business owners can choose to operate as:

• A sole trader where the business is managed and owned by the same person, and the owner is responsible for the business's debts.

• A partnership where more than one person owns and manages the business, and all share in the liability for the company's debts.

What are the tax implications of selling your business?

Selling a business can be exciting and lucrative. However, it's essential to know the costs and the tax implications of selling up.

When selling your business, you may be liable for various taxes, including capital gains tax (CGT) and and corporation tax.

It is always wise to hire someone to advise you on possible tax relief options.

In addition to taxes, various fees may apply during the sale of a business.

If you use a business broker it may charge a fee of between 1% and 10%. 

There will also be legal fees, generally at least 1% of the final sale value. Accountancy fees may reach £5,000, depending on the size of the company and the work involved.

You may also have to pay conveyancing fees and for licenses, permits, and energy performance certificates.

If you've employed someone to give HR advice regarding your employees or hired an escrow agent to hold the funds until the transaction is complete, you will have to pay for this as well.

How can I sell my business?

When considering how to sell a business in the UK, entrepreneurs have many options to consider, each with implications for tax, legal obligations, and future control of the business.

Some of these methods include:  

• Asset sale: The buyer purchases specific assets and liabilities of the business instead of acquiring the company itself.

• Share sale: A share sale involves the transfer of ownership of the whole company, including its assets, liabilities, and legal obligations. This option can offer potential tax advantages, like business asset disposal relief for qualifying sellers.

• Management buyout (MBO) or management buy-in (MBI): In an MBO, the company's existing management team purchases it from the owner. An MBI occurs when external investors or managers acquire the business. It may offer tax-planning opportunities for both parties.

• Merger or acquisition: A merger occurs when two or more businesses combine to form a new entity, while an acquisition involves one company purchasing another. These can be structured in various ways, including share exchanges, cash transactions, or a combination of both, each with distinct tax implications.

• Employee ownership trust (EOT): You sell a controlling stake in the business to a trust established for the benefit of employees. This form of sale can be structured to be tax free for the seller. John Lewis is one of the most well-known companies to be owned by its staff.

How do I know how much tax to pay when selling a business?

Knowing how much tax to pay when selling a business requires an understanding of the three types of tax that apply:

• Capital gains tax

• Corporation tax

Capital gains tax

One of the tax implications of selling a business is the requirement to pay CGT on the profits from the sale.

Basic-rate taxpayers pay 18% tax (increased from 10% in October 2024).

Higher-rate and additional rate taxpayers will pay 24% ( up from 20% in October 2024).

Each year you can enjoy £3,000 of gains, free of CGT. This is called the annual exempt amount.

However, people selling businesses may be able to claim business asset disposal relief too. So long as certain conditions are met, this limits the rate of CGT to 18%. 

Business asset disposal relief

Business asset disposal relief was previously known as entrepreneurs’ relief and is a type of CGT relief. There is currently a £1 million lifetime limit on gains made since March 2020, significantly reduced from a previous £10m cap. This is set to fall again to just £500,000 in April 2027.

You can claim business asset disposal relief if you're an individual selling your business or shares in the company or are an employer or director selling shares in a company where you're employed.

Eligibility for this tax relief also involves being a business partner or sole trader and having owned the company for a minimum of two years.

The deadline is 31 January in the tax year after you dispose of the business.

Corporation tax

Corporation tax is applicable when a business owner sells part or all of a limited company's assets.

The rate you pay depends on your company profits:

• Small profits rate (below £50,000): 19%

• Main rate (companies with profits above £250,000): 25%

If your profits are between £50,000 and £250,000, you pay the  main rate, reduced by marginal relief.

You can use this marginal relief calculator on the government website to calculate how much corporation tax your business needs to pay.

Get expert financial and tax advice

Selling a company can be profitable, but numerous costs can affect the bottom line.

The tax implications of selling a business can have a significant effect on profits, and the same applies to fees charged by professionals assisting with the sale. 

It's worthwhile finding a qualified accountant to advise on tax reliefs and allowances. Let Unbiased match you with the right financial professional for your needs.