selling your business

While we always recommend initiating talks about selling your businesses as far in advance as possible (up to 5 years), it’s true that you have more control over when it enters the market than when the sale completes. It stands to be the case that a business sale can complete at various points throughout the year. However, when a sale occurs at the end of the financial year, it’s only natural that additional questions about the tax you have to pay, and when you will have to pay it, will pop up.

We’ve decided to answer some of the key tax concerns that pop up when selling your business at the end of the tax year.

Do I pay capital gains tax or corporation tax upon selling a business?

You may have to pay capital gains tax if you make a profit (or gains) when you sell all or part of a business asset. For example, a business’ assets you may need to pay tax on includes land, buildings, fixtures and fittings or machinery. However, that does not exclude business-only sales (or any that aren’t lease or freehold) from the tax. This is because assets also includes things that are harder to define, such as a business’s reputation.

Crucially, you will pay capital gains tax if you’re a self-employed sole trader or in a business partnership. Other organisations like limited companies pay corporation tax on profits from selling their assets. To be exact, corporation tax on chargeable gains is only paid by limited companies.

How do I calculate capital gains tax on a business sale?

As with any other assets, the basic principles apply, and do so whether you are a sole trader, are in a partnership or are holding shares in a limited company.

Firstly, you should deduct the costs of buying, selling, or improving your asset from your gain. For example, costs you can deduct include:

  • Fees, for example for valuing or advertising assets.
  • Costs to improve assets.
  • Stamp Duty Land Tax.

However, some costs cannot be deducted, such as:

  • Any interest on a loan used to buy your asset.
  • Any costs you can claim as business expenses.

Can you claim business asset disposal relief if you sell your business at the end of the tax year?

Business asset disposal relief, which was named entrepreneurs’ relief before 2020, is the tax you pay when you sell a business and is a form of capital gains tax relief. However, a claim for entrepreneurs’ relief must be made before the first anniversary of the 31st of January following the end of the tax year in which the relevant disposal takes place.

It’s worth noting that whenever you sell a business and financial gain is made from said sale, capital gains tax must be paid. To be exact, capital gains tax applies to the overall profits made over the tax-free threshold of £12,300 and is currently charged at a rate of 20%.

Business asset disposal relief allows you to apply a lower rate of 10% capital gains tax on the profits you have made. This rate is lower than the income tax you would otherwise pay, which is 20%-basic, 40%-higher, 45%-additional. This means that business owners can benefit from keeping more profit from the sale of the business. In fact, business owners can claim business asset disposal relief more than once, as long as they don’t exceed the £1 million limit.

Before a business goes up for sale, it is crucial for the owner to know it’s true value. If the business owner knows the true value well in advance, they have the chance to increase it and potentially achieve a higher sales price before it goes on the market.

However, not only is a valuation important for understanding a businesses’ potential value but it can be used as an indicator and management tool. For example, companies that are preparing to sell, can use valuation as an indicator aimed at building value in order to drive additional money on the sale. 

In addition, many business owners get their business valued in order to gain an accurate insight into their companies’ assets. An accurate business valuation allows owners to understand how much to reinvest in their company or how much to sell it for in order to be profitable. With that being true, it stands to follow that a valuation is a way to calculate any reliefs that you may qualify for when selling a business.

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