Whether you’re looking to retire or move on to a new venture, selling your business is a big decision. When you sell your business, you can either sell the assets (trade) or sell the company shares. Each method has distinct tax consequences.
If you’re incorporated as a limited company, you’ll usually be faced with two choices for how to structure a sale.
You can choose between:
- Selling the trade: The operational assets owned by the business.
- Selling the company shares: Your shares in the company to a new owner.
Both options come with distinct tax outcomes. Understanding these implications is crucial before choosing the best route for your sale.
Deciding the most tax-efficient route to a sale
Assume you’re running a limited company and want to sell your business. The tax consequences of selling either the trade or company shares can vary greatly.
- Selling the trade means selling any assets used by the business. This would mean your business premises and equipment, together with any goodwill associated with the business. In this case, the vendor is the limited company.
- Where the company shares are sold instead, the vendor is the shareholder and the company itself continues as before.
- From your viewpoint as the exiting owner, the main tax consideration revolves around tax on any capital gain, where the selling price is above the deductible cost.
- In a share sale, you pay tax on the sales proceeds minus any associated cost or ‘base cost.’ Often, the base cost is minimal—sometimes just the nominal value of the shares.
- Presuming the sale qualifies for Business Asset Disposal Relief (BADR), the first £1 million is taxed at 10%, with the balance at 20%. Where BADR does not apply, any gain in the basic rate band will be taxed at 10% and the remainder at 20%. Where there are multiple shareholders, eg husband and wife, each of them is entitled to the £1 million BADR band. Please note, the £1m 10% rate is a lifetime allowance and any previous claims will reduce the availability of BADR.
- If the trade (assets) are sold instead of the company shares, the company itself will pay tax on any gain at normal corporation tax rates. This will be between 19% and 25%, depending on overall profits. When any remaining surplus is taken out of the company by the shareholders, either as dividends or on liquidation if the company is no longer needed, there will be a further tax charge to the owners.
- Unless there are specific reasons to the contrary, eg where the company is only disposing of part of its operations, the seller will almost always want to sell the company shares rather than the trade and assets.
Understanding the right route for your sale is crucial. If you need expert guidance, our business tax advice can help you navigate the best option for your situation.
Buying the business from the purchaser’s point of view
If you’re the purchaser, buying the shares is straightforward. However, buying the company shares does not produce any tax deductible expenses for the purchaser, unless you subsequently sell the shares on. At that point, the purchase cost will be deductible for Capital Gains Tax purposes.
In addition, because the company is carrying on as the same legal entity, you’ll want to carry out an enhanced due diligence exercise to attempt to establish if there are any undisclosed or contingent liabilities. In effect, you’re taking over any ‘baggage’ that’s come about prior to your period of ownership, so it’s sensible to check what these liabilities are so they’re on your radar.
Buying the assets creates a tax-deductible cost base, particularly for qualifying plant, machinery, and equipment. Subject to strict conditions, this can also apply to any goodwill that arises. However, transferring licences and customer or supplier contracts from the old company to the new entity may be complex. Additionally, any trading losses incurred by the old company will be lost.
Talk to us about a tax efficient sale of your business
The preferred route for the buyer and seller often conflicts. As a result, the route you choose can significantly affect the selling price achieved.
Whether you’re buying or selling a business, it’s important to understand which route offers the most benefits for you. If pressure from the other party pushes you towards a sub-optimal choice, you should seek some appropriate adjustment to the selling price.
If you have a group structure, there may be more than one company involved for at least 12 months before the sale. In this case, the tax situation can differ significantly if the legal entity selling the shares is another limited companyIf no such group structure exists, you might consider creating one in advance. You can do this by forming a dormant subsidiary. This allows you to take advantage of the scenario described earlier. In this way, the vendor can resolve the conflict. They can transfer the trade into a dormant or newly formed company, free from historical liabilities. After that, the vendor can sell those shares to the purchaser.
If you’re thinking of selling your business, we can help you achieve the best possible outcome for the sale.
Contact our business advisers on 0161 761 5231 or email theteam@horsfield-smith.co.uk.
