Selling a business can be an exciting milestone for self-employed workers and sole traders in the UK. But whether you're retiring, moving onto a new venture, or simply looking to cash in on your hard work, it's important to understand the tax implications involved with this type of sale. 

In today’s article, we'll walk you through the tax you may be liable for when selling a business in the UK - as well as the tax relief that you could be eligible for. 

The main type of tax you need to understand when selling your business is Capital Gains Tax (CGT): 

What is Capital Gains Tax? 

When you sell your business, you may be required to pay Capital Gains Tax on any profit made from the sale. The CGT rate typically depends on your overall income and the amount of profit you’ve earned from the sale. For the 2023/2024 tax year, the rates are 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers. 

In the UK, Capital Gains Tax must be paid either through HMRC’s ‘real time’ Capital Gains Tax service, or through Self Assessment at the end of the tax year.

The good news is that, as the name suggests, Capital Gains Tax is calculated only on the profit (gains) you make from selling your business, rather than the amount you sold it for.

And there's even more good news for sole traders and entrepreneurs! The UK offers Business Asset Disposal Relief (which was previously called ‘Entrepreneurs’ Relief’), which reduces the CGT rate to a flat 10% on the first £1 million of qualifying gains. We’ll break this relief down later in the article - and explore some other tax relief options that you may be able to benefit from. 

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What are the tax implications of earn-out arrangements?

When selling your business, it's not uncommon to receive part of the payment through an earn-out arrangement. This means you'll receive additional payments based on the business' performance after the sale. While earn-outs can be a smart option for some sellers, bear in mind that they can also affect your tax position.

HMRC has specific rules regarding earn-outs, and any amount tied to future performance might be taxed differently. So, if you’re planning to use this pricing mechanism, it's important to speak to a professional tax advisor and carefully structure your earn-out agreement to keep tax costs to a minimum and avoid any unexpected surprises. 

Taking advantage of Capital Gains Tax allowances and reliefs 

As we touched on earlier, Business Asset Disposal Relief can be a game-changer for sole traders and business partners looking to sell their business, as it significantly reduces the amount of CGT they’re obligated to pay. 

However, keep in mind that this relief comes with limitations. The lifetime limit for qualifying gains under Business Asset Disposal Relief is £1 million. If you’re lucky enough to be making gains above this threshold, they will be taxed at the standard CGT rate.

To be eligible for Business Asset Disposal Relief, you must be a sole trader or business partner, and you must have owned the business you’re selling for at least two years before the sale. We advise speaking with your accountant or tax advisor to check whether you qualify for this relief.

Delay paying tax on the sale with Business Asset Rollover Relief

If you plan to reinvest the proceeds from your business sale into a new business asset, you might also be eligible for Business Asset Rollover Relief. This type of tax relief allows you to defer paying CGT on your gain if you reinvest it within three years before or one year after the sale.

Business Asset Rollover Relief can be a valuable tool to preserve your profits and grow your new venture without the burden of immediate CGT payments. Again, we recommend checking with an accountant or tax advisor to ensure you meet all the necessary conditions to benefit fully from this scheme.

Incorporation Relief and Gift Hold-Over Relief

Incorporation Relief applies when you transfer business assets (excluding cash) to the newly formed company in exchange for shares. It essentially means that if you’re a sole trader, a business partner or have set up a limited company, you can delay paying CGT on those assets.

Plus, if you give away business assets or shares to friends or family, or sell them for less than they are worth, you may also be eligible for Gift Hold-Over Relief. This means you won’t pay any CGT on those assets, but the recipient of the assets will pay CGT on them when they later sell them off themselves. 

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Timing your sale right

We recommend starting to think about and plan the sale of your business a few years before you intend to sell. Planning ahead will help make the process smoother and more efficient and help you maximise your profits.

It’s also worth considering that by spreading the sale of your business and assets across multiple tax years, you could potentially use your annual CGT allowance more effectively. For example, for the 2023/2024 tax year, the annual exemption is £12,300, which means you won't pay CGT on gains up to this amount.

You’re ready to start planning your sale

Selling a business can be as daunting as it is exciting, but fully understanding the tax implications can make the whole process much more straightforward. The most important thing you can do to prepare is to seek professional advice from a qualified accountant or tax advisor before making any decisions about the sale.

They will guide you through the process, find out whether you qualify for allowances such as Business Asset Disposal Relief, and help you stay on top of all of your tax obligations.

At Crunch, we understand the unique challenges faced by sole traders and small business owners. Our expert accountants are here to support you through every step of your business journey, from startup to sale. With the right advice and planning, you can confidently sell your business and embrace new opportunities with peace of mind.

So, if you're considering selling your business, consider consulting a professional who can help you make the most of this exciting next chapter. Cheers to your success!