Understanding the Tax Implications of a Business Sale

When selling your business, understanding the tax implications is essential to maximising your net proceeds. A successful sale is about more than just achieving a strong valuation — it’s also about structuring the deal efficiently and taking advantage of the reliefs available. Early planning, combined with specialist advice, can make a significant difference to what you ultimately retain from the sale.

Why Tax Planning Matters Before You Sell

Tax considerations should never be an afterthought. The structure of your deal — whether you sell shares, assets, or transition to an Employee Ownership Trust (EOT) — directly affects how much tax you pay and when. By starting early, you give yourself time to align ownership, review shareholder positions, and make use of available reliefs before heads of terms are signed.

Common Tax Liabilities When Selling a Business

When you sell your business, you may face one or more of the following taxes, depending on the structure of the sale:

• Capital Gains Tax (CGT): Charged on the gain made from selling shares or business assets. The rate is typically 10% or 20%, depending on eligibility for reliefs and your income level.

• Corporation Tax: If a company sells its assets and then distributes the proceeds to shareholders, Corporation Tax is paid first, followed by potential personal tax on distribution.

• Income Tax: May apply on certain payments made to owners or directors during or after completion (for example, earn-outs or employment-related payments).

Business Asset Disposal Relief (formerly Entrepreneurs’ Relief)

Business Asset Disposal Relief (BADR) allows qualifying individuals to pay a reduced CGT rate of 10% on the first £1 million of lifetime gains when selling all or part of a business. To qualify, you generally need to:

• Own at least 5% of the company’s shares and voting rights.

• Have been an officer or employee of the company for at least two years prior to sale.

• Sell shares in a trading company or holding company of a trading group.

Planning ahead ensures all conditions are met and maintained leading up to the sale, helping secure the relief and avoid last-minute disqualification.

Share Sale vs Asset Sale

Share Sale

In most cases, selling shares is the preferred option for both sellers and buyers. It transfers ownership of the company as a whole and allows sellers to benefit from CGT rates and available reliefs like BADR. Buyers typically acquire all assets and liabilities, which may lead to negotiation on warranties and indemnities.

Asset Sale

In an asset sale, the buyer acquires selected assets (such as stock, equipment, goodwill, or customer contracts) but not the company itself. The selling company pays Corporation Tax on any gain from these disposals. When proceeds are later distributed to shareholders, additional personal tax may apply. This often results in a higher overall tax burden for the seller, although buyers may prefer it for flexibility.

Employee Ownership Trust (EOT) Sales

For qualifying companies, selling a controlling interest (more than 50%) to an Employee Ownership Trust can be completely free of Capital Gains Tax. This route not only rewards staff and preserves legacy but can also deliver a full-value exit for owners without external buyers. To qualify, the business must meet specific trading and ownership tests, and at least the majority of shares must be sold to the trust. EOT structures also require ongoing compliance and professional governance once established.

Timing and Structuring Considerations

• Ownership review: Ensure shares are held personally (not through another entity) and qualify for reliefs.

• Sale timing: Review your tax year and consider spreading completion payments over multiple tax years to manage liabilities.

• Pre-sale dividends: Extracting retained profits before completion can be efficient when structured correctly.

• Earn-outs: Understand how deferred payments and performance-linked earn-outs are taxed — timing and documentation are critical.

• Pension and estate planning: Integrate sale proceeds into your wider financial plan to minimise longer-term tax exposure.

Working with Professional Advisers

Tax efficiency depends on coordination between your accountant, corporate finance adviser, and legal team. The right structure depends on your personal circumstances, the buyer’s requirements, and the form of consideration (cash, shares, loan notes, or EOT funding). Engaging specialists early avoids rushed or suboptimal decisions at completion.

Tax efficiency is a crucial part of any successful business sale. Whether you are planning a trade sale, a management buyout, or a transition to employee ownership, early preparation gives you more options and more control. With the right structure and the right advisers, you can protect your wealth, reward your team, and achieve a smooth, financially efficient exit.

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