Selling your business – common tax myths

Myth: The transaction will be taxed as a Capital Gain so I will pay no more than 20% tax on the whole value.

Fact: Whilst the headline rate of Capital Gains Tax (CGT) is 20% (2024/25), there are some circumstances where the tax liability is greater.

Several anti-avoidance rules could effectively treat all or part of the proceeds of a sale as subject to Income Tax. This is typically 39.35% but can be up to 47% plus a company liability of 13.8.% if the proceeds are deemed to be employment income. 

If there are assets a buyer does not wish to acquire (or the vendor does not wish to sell), these must be extracted before the sale. This may be excess cash or other assets such as an investment property. In the absence of more complex restructuring, this extraction will be treated as a dividend and taxable at Income Tax rates of up to 39.35%. If the asset isn’t cash, as well as Income Tax, there may be a Corporation Tax charge for the company of up to 25% on any gain on the asset.

Similarly, a buyer may only want to buy a particular subsidiary. Again, if the substantial shareholding exemption is unavailable, this may be subject to Corporation Tax at up to 25%. If the cash is then extracted from the holding company, this can take the effective tax rate over 50%.

What you can do

You can often apply for advanced clearances, and documentation of the right contemporaneous evidence can often go a long way to mitigating these risks.

Pre-sale planning can be undertaken to demerge relevant assets in a tax-neutral way, or the transaction structured to take advantage of reliefs such as the substantial shareholding exemption or utilise a member’s voluntary liquidation. Timing is imperative here, you may need anywhere between 12-24 months to ensure qualification for relevant reliefs.

Myth: I can become non-UK tax resident and pay no tax on the sale of my business.

Fact: CGT is not typically paid by non-UK residents but there are several exceptions.

1. You must be a non-UK tax resident for the whole tax year (or have a split-year residence) prior to the sale. Therefore, planning should begin in the year prior to the tax year of sale. If the sale is expected to complete in January, you would need to start planning almost a year in advance.

Days you can spend in the UK are likely to be limited and you will need to consider whether this is compatible with the demands of facilitating the sale. 

2. If the company holds substantial UK land, the disposal could still be within the scope of UK CGT even if you are non-resident at the time of sale. 

3. If you return to the UK within five years, the disposal (and other receipts such as dividends) may be brought back into the scope of UK CGT – at which point you could have spent the funds.

4. Every jurisdiction has different tax residency criteria and different charging provisions/rates to the UK. It is therefore important to seek advice from an international tax adviser to ensure you do not end up with more tax to pay overall.

5. If you are a non-resident, you should also consider how this sale could impact the corporate residence or create a permanent establishment leading to a Corporate Tax liability in the destination country.

What you can do

You should consider whether becoming a non-UK resident is right for you and your long-term goals. We recommend that you seek advice from an international tax adviser who can support you with this decision.

You could also consider structuring the sale as a corporate disposal so that you can control the timing of the personal tax point, only triggering a disposal once you have achieved non-residence

Myth: I do not need to think about my Inheritance Tax (IHT) exposure now, I can deal with this once the sale has been completed. 

Fact: If you do not consider IHT planning pre-sale, you may miss the opportunity to protect your funds from further tax exposure. For example, trusts can be an effective way of protecting wealth whilst reducing your IHT exposure. 

What you can do

We recommend that you carry out a cashflow modelling exercise with a financial planner in advance of, or in the early stages of the sale process. If cashflow modelling is done in advance of the sale, a financial planner can help you understand how much money you realistically will need to meet your financial objectives and how you protect and invest these funds for the future.

Myth: I qualify for business asset disposal relief (BADR) so I will only pay tax at 10%.

Fact: The conditions to qualify for BADR have been tightened in recent years. You need to have held at least 5% of the ordinary share capital for a minimum of two years. There have also been cases where the use of different share classes within a company meant that some individuals didn’t qualify for BADR. The company also has to meet the definition of a trading company throughout the two years before the disposal. Where a company has significant cash balances or non-trading assets, this may impact the availability of BADR. 

The BADR lifetime limit was also reduced to £1m in 2020, meaning only the first £1m of gains will qualify for the reduced tax rate of 10%.

What you can do

We recommend reviewing both the trading position and rights attached to the company shares at least 24 months before a sale.

Myth: I can gift some of my sale proceeds to employees post-sale to reward them for helping me build the business and there will be no tax to pay as I have already paid CGT on the sale proceeds.

Fact: Unfortunately, this generosity does have additional tax consequences and these gifts to employees are likely to be taxable as employment income, meaning that PAYE with Income Tax at the relevant rates will be due as well as Employee’s and Employer’s National Insurance.  It is also commonplace for purchasers to ask sellers to give an indemnity for any tax liabilities arising as a result of such gifts.

What you can do

 It is possible to reward employees in a tax-efficient manner if appropriate planning is undertaken in advance of a sale (e.g. EMI schemes, CSOPs, SIPs and even cash bonus plans).  We recommend discussing this as early as possible.  Employee incentive plans can also be a great way of incentivising and retaining key employees.

Get in touch

If you are considering a business sale or are looking to manage your funds post-sale, please do not hesitate to get in touch to discuss how we can support.

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