Selling your business: the tax you need to plan for before you sign anything

Selling a business is one of the largest financial events most people experience. The tax implications are substantial, and the planning that matters most happens before you sign, not after.

Business Asset Disposal Relief, the main relief available to business owners, can be the difference between paying 10% capital gains tax and paying 24%. On a significant sale, that is a very large number.

What Business Asset Disposal Relief is

Business Asset Disposal Relief, previously called Entrepreneurs' Relief, reduces the rate of capital gains tax to 10% on qualifying gains from the sale of a business or business assets. The relief applies up to a lifetime limit of £1 million of qualifying gains.

Gains above £1 million are taxed at the standard CGT rate, currently 24% for higher rate taxpayers. The lifetime limit is cumulative across all qualifying disposals.

How to qualify

• You must be an employee or officer of the company
• You must hold at least 5% of the ordinary share capital
• Your 5% shareholding must carry at least 5% of the voting rights
• You must be entitled to at least 5% of the distributable profits and assets on a winding up
• The company must be a trading company, or the holding company of a trading group

The two-year qualifying period must be met before the date of disposal. If you restructured your shareholding, changed your role, or the company changed its activities in the two years before sale, you may not qualify even if you expected to.

Why timing matters so much

The qualifying conditions are tested at the point of disposal, not at the point of planning. If issues are identified before exchange, they can often be addressed. After exchange, they cannot.

A tax adviser who reviews your position before heads of terms are signed can identify and, in many cases, resolve issues while there is still time to act.

The difference planning makes

On a £500,000 gain, the difference between 10% and 24% is £70,000. On a £1 million gain, it is £140,000. These are not marginal differences. They are worth the cost of specialist advice many times over.

What happens to the proceeds

Once you have sold your business and paid the CGT, the proceeds sit in your estate. If the proceeds are significant, they could substantially increase your inheritance tax exposure, particularly after April 2027 when pension planning becomes less effective as an offset.

Thinking about what to do with the proceeds from an estate planning perspective, alongside the CGT planning, means you avoid creating a new problem while solving an existing one.

Simply Estate is an estate planning firm. Our own tax team can review your qualifying position and structure your sale efficiently. Visit our business tax planning page to book your free review.