If you are planning on selling your small business, the two main options available to you are selling your company shares, which normally includes all the assets and liabilities of the company with no remaining connections to with the company. Or you can sell the business with its assets, name and goodwill usually referred to as an “asset sale”.
Selling your company shares is usually the best route to take as it is a much cleaner process of extraction for you and much more tax efficient option, as an asset sale can lead to a double tax charge when trying to extract the sale proceeds. Furthermore, you will also need to deal with the remaining liabilities and the legal entity of the company that remains.
Capital Gains Tax
Capital gains tax is a tax charged on all capital gains, which are profits on the sales of business assets. If you have a business asset, the capital gains tax only applies when you sell the asset, whether it be for a profit or loss.
Capital losses are tax differently depending on how long they are held. Short-term capital gains which are held under a year are taxed at the regular income tax rate. The tax rate for long-term gains, however, is 17 percent.
If you are selling a business, the most important consideration will normally be whether or not you will qualify for Entrepreneurs’ Relief, which means you only pay 10% capital gains tax on any qualifying gains. Entrepreneurs’ Relief can be claimed by Directors as well as Directors’ spouses or partners in qualifying cases, sole traders as well as Partners and employees of companies.
It is an incredibly valuable tax relief and there is no limit to how many times you can claim and you are able to claim up to £10 million of relief in total, during your lifetime.
Do you qualify for Entrepreneurs’ Relief?
You should be able to qualify for Entrepreneurs’ Relief if you decide to dispose or sell any of the following:-
- All or part of your business as a sole trader or business partner – including the business assets after it closed
- Shares in a Company where you have at least 5% of shares and voting rights
- Assets you lent to your business or Company
If you are sell shares in your company you must be meet all the following criteria for at least 24 months, before you sell your shares:-
- You are a sole trader or business partner
- You have owned the business for at least two years before the date you sell or close it
- You sell or dispose of your business assets within 3 years after selling or closing the business
You have at least 5% of the shares and voting rights in the Company
- You are entitled to at least 5% of the distributable profits & net assets of the Company
- You are an employee or director of the Company (or one in the same Group)
- The Company’s main activities are in trading (rather than non-trading activities like investment)
If you decide to sell assets you lent to the business, all of the following criteria must apply:
- You have sold your part of a business partnership or your shares in a Personal Company
- You owned the assets but let your business partnership or Personal Company use them for at least two years up to the date you sold your business or shares
Do I need to consider anything else to proceed?
When looking to partially or wholesale sell your business, it is important to consider your overall tax and long-term financial position before extracting profits.
For example, you may not be receiving tax credits or universal credits currently, which you not want to lose, as any income you receive could affect your personal allowance entitlement. Ideally, you should aim to avoid paying tax at the 45% additional rate if at all possible or 41% in Scotland.
You would expect though that whoever buys your company will expect you to extract all of the company’s held before the sale, albeit some working capital for the shorter term will likely be retained by the company. If there is a substantial amount of funds in the business to extract, it may make sense to stagger profit extraction over several years, which is more tax efficient than a last minute total extraction of profit.
Southside Accounting can help
If you are thinking of selling a business, remember that tax rules often change and it always pays to take professional advice first. Certainly, any shareholders with anything but a simple share structure should seek advice on their right to claim this highly important tax relief.
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Written by Shaima Todd.