Tax implications of selling a business

Selling a company – share sale or asset sale?

If you are selling a company, you need to consider whether you will sell shares or sell assets. Selling shares, also referred to as a share sale, includes all the assets and liabilities, and an asset sale, is the sale of the business, with its assets, name, and goodwill.  

Usually, it’s beneficial to sell shares, rather than choose an asset sale. If an asset sale proceeds, you will face the problem of extracting the sale proceeds, which could lead to a double tax charge. You will also have to deal with any remaining liabilities and deal with the legal entity of the company that remains.

Business asset disposal relief (formerly known as entrepreneurs’ relief)

If you are selling a business, the most important consideration (as far as tax is concerned) is whether you qualify for Business Asset Disposal Relief (BADR). This means that you only pay 10% capital gains tax (CGT) on qualifying gains. BADR can be claimed by directors (and directors’ spouses or partners in qualifying cases), sole traders as well as partners and employees. There’s no limit to how many times you can claim BADR, but from 11 March 2020, a lifetime limit of £1 million of relief applies.

Do you qualify for BADR?

You should be able to qualify for BADR, if you dispose 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 owned at least 5% of shares and voting rights (known as a personal company)
• assets you loaned to your business or company.

If you are selling all or part of your business, all the following must apply:

• you are a sole trader or business partner
• you 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 three years after selling or closing the business.

If you are selling shares, all the following must apply for at least 24 months before you sell your shares:

• you owned at least 5% of the shares and voting rights in the company
• you are entitled to at least 5% of the distributable profits and 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 or it is the holding company of a trading group.

Trading vs investment nature

Many businesses can have a mixed status, for instance, trading and investment such as receiving rent or interest. The key point is that any non-trading activities must not be substantial. HMRC’s interpretation of ‘substantial’ is over 20% of total business activity (both trading and non-trading).

A business, whose non-trading activities amount to more than 20% of its total activities does not meet the trading requirement. Accordingly, BADR will not be relevant and the normal 20% rate of CGT will apply. That’s why planning for sale as far in advance, can be critical, as it might be appropriate to split the business in two, creating one that is purely trading (on which BADR could then apply) and another where it’s accepted the standard CGT rate will apply on sale.

Balance of indicators

The indicators should not be regarded as individual definitive tests, to which a 20% limit applies. They are factors, or indicators, which may be useful in establishing whether there is substantial overall non-trading activity. It may be that some indicators point in one direction and others the opposite way.

The matter should be judged in the round. The individual indicators are turnover, asset base, expenses incurred by the company and time spent by the business.

If you are selling assets, you loaned to the business, all the following must apply:

• you sold at least 5% of 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 one year, up to the date you sold your business.

It's worth noting that any gain could be exempt if you sell during a period of non-UK residence, subject to the anti-avoidance rule of temporary non-UK tax residence.

How can Crowe help?

We can provide the guidance and support necessary to maximise the tax efficiency of the sale of your business, which will avoid any nasty tax surprises arising later.

If you have any questions about the topics raised in this article or to discuss your individual circumstances, please get in touch with Pete Fairchild or your usual Crowe contact.