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Navigating Tax Implications for Small Business Sales in the UK




As a small business owner in the UK contemplating a sale, understanding your post-sale tax position is critical. While we are not tax advisors, our extensive experience in successfully selling many SME businesses equips us to shed light on the general tax position surrounding business sales. You might qualify for a special capital gains tax relief, previously known as entrepreneurs' relief, now called business asset disposal relief. In this guide, we explore this relief alongside another significant option – the Employee Ownership Trust (EOT).


Do I pay capital gains tax on a business sale?

Yes, you generally need to pay capital gains tax (CGT) when selling a business. However, various reliefs, such as the business asset disposal relief, can potentially reduce the amount you owe. This relief allows you to be charged a mere 10% on the first £1m of gains during the sale of a qualifying business.


How does entrepreneurs' relief work?

Now known as business asset disposal relief, this avenue permits you to pay a basic CGT rate of 10% on the first £1m of gains. This is a boon, particularly for higher or additional-rate taxpayers who normally pay a 20% tax on most assets. It is important to note that this £1m allowance applies per individual, not for each business sale.


Who can claim entrepreneurs' relief?

This relief is open to sole traders, business partners, or those holding at least 5% of shares and voting rights in a 'personal company'. Additionally, you should have owned the business or assets for a minimum of two years before the sale to avail of this relief.


Are there any other conditions?

Yes, the business needs to be actively trading with a primary aim to make profits and should not predominantly involve in investment activities. This relief is valid if you sell your business assets within three years of cessation of your business.


What is an Employee Ownership Trust (EOT) and how can it benefit me?

An alternative to business asset disposal relief is structuring your business sale through an Employee Ownership Trust (EOT). In an EOT, if 100% of the business shares are transferred, the sale is free from capital gains tax, offering a tax-efficient exit strategy. While this can result in substantial tax savings, it may not be the optimal solution for every business owner. Therefore, consulting with an experienced business sale adviser will aid in understanding the potential benefits and downsides of both EOT and business asset disposal relief, helping you to choose the path that is most beneficial for your unique circumstances.


How does CGT work without entrepreneurs' relief or EOT?

Absent business asset disposal relief or an EOT arrangement, you would be liable to pay the standard CGT rate. For higher and additional-rate taxpayers, this rate stands at 20%. It is paramount to conduct a thorough analysis to ascertain your eligibility for reliefs and judiciously plan your business sale to optimize your gains while minimising tax liabilities.


Conclusion

Selling your business is a big decision, and being well-versed with the potential tax implications is vital. Whether considering business asset disposal relief or the Employee Ownership Trust route, it is advisable to first seek the counsel of an experienced business sale and exit adviser to receive tailored input to your circumstances. Making informed decisions with the help of expert guidance can pave the way for a successful business transition, with maximised benefits from the potential reliefs available.



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