Selling your business: what are the tax implications?

Selling your business is a big decision. If you’re incorporated as a limited company, you’ll usually be faced with two choices for how to structure this sale.

You can choose between:

• Selling the trade – i.e. the operational assets owned by the business
• Selling the company shares – i.e. selling your shares in the company to a new owner

Both routes have their own distinct tax outcomes. Having a good understanding of these implications is extremely important before you make a decision on your preferred route.

Deciding on the most tax-efficient route to a sale

Let’s assume that you’re running a business that was set up as a limited company. When you want to sell the business, the tax and other implications of selling either the trade or the company shares can be very different.

• Selling the trade means selling any assets used by the business. This would mean your business premises and equipment, together with any goodwill associated with the business. In this case, the vendor is the limited company.
• Where the company shares are sold instead, the vendor is the shareholder, and the company itself continues as before.
• From your viewpoint as the exiting owner, the main tax consideration revolves around tax on any capital gain, where the selling price is above the deductible cost.
• In the case of a share sale, the sales proceeds less any associated cost (‘base cost’) will produce a taxable gain. In many cases, the base cost is close to zero – often just the nominal value of the shares.
• Presuming the sale qualifies for Business Asset Disposal Relief (BADR), the first £1 million is taxed at 10%, with the balance at 20%. Where BADR does not apply, any gain in the basic-rate band will be taxed at 10%, and the remainder at 20%. Where there are multiple shareholders, e.g. husband and wife, each of them is entitled to the £1 million BADR band.
• If instead of selling the company shares, the trade (assets) are sold, any gain is taxed in the company itself at normal corporation tax rates. This will be between 19% and 25% depending on overall profits. When any remaining surplus is taken out of the company by the shareholders, either as dividends or on liquidation if the company is no longer needed, there will be a further tax charge on the owners.
• Unless there are specific reasons to the contrary, e.g. where the company is only disposing of part of its operations, the seller will almost always want to sell the company shares rather than the trade and assets.

Buying the business from the purchaser’s point of view

If you’re the purchaser, buying the shares is straightforward. However, buying the company shares does not produce any tax-deductible expenses for the purchaser, unless you subsequently sell the shares on. At that point, the purchase cost will be deductible for capital gains tax purposes.

In addition, because the company is carrying on as the same legal entity, you’ll want to carry out an enhanced due-diligence exercise to attempt to establish if there are any undisclosed or contingent liabilities. In effect, you’re taking over any ‘baggage’ that’s come about prior to your period of ownership, so it’s sensible to check what these liabilities are, so they’re on your radar.

Buying the assets, however, creates a tax-deductible cost base, certainly for any qualifying plant, machinery and equipment. Subject to fairly strict conditions, this can also create a tax-deductible cost base for any goodwill arising. But there may be complexities in transferring licences and customer and supplier contracts from the old company into whichever new entity is used to carry on the business in the future. Also, any trading losses incurred by the old company will be lost.

Talk to us about a tax-efficient sale of your business

Because the preferred route for the buyer and seller will often be conflicting, the final route you choose can have a significant effect on the selling price that’s achieved.

Whether you’re buying or selling a business, it’s important to clearly understand which route has the most benefits and advantages for you. If pressure from the other party pushes you towards a sub-optimal choice, you should seek some appropriate adjustment to the selling price.

It might be that you have a group structure, with more than one company in the mix for at least 12 months prior to the sale. In this scenario, the tax situation can be very different if the legal entity selling the shares is itself another limited company. It’s often useful where no such group structure exists to create one in advance. You can do this by forming a dormant subsidiary, purely to be able to take advantage of that scenario. In effect, the conflict can be resolved by the vendor transferring the trade down into a dormant (even newly formed) company, therefore without any historical liabilities, and then selling those shares to the purchaser.