Understanding Tax Obligations When Selling Your Business in the UK

Selling a business can be a significant financial milestone, but it’s important to be aware of the tax implications that come with it. In the United Kingdom, various taxes may apply when an owner sells their business, including Value Added Tax (VAT) and Capital Gains Tax (CGT). In this article we will explore these tax obligations and provide a comprehensive overview of what business owners need to know when navigating the sale of their business in the UK.

1. Value Added Tax (VAT):

VAT is a consumption tax that is levied on the value added to goods and services at each stage of production or distribution. Whether you need to pay VAT when selling your business depends on several factors:

a. Selling Assets or Shares:

Asset Sale: If you are selling the assets of your business, VAT may apply to the sale. You will typically charge VAT to the buyer, and this will be added to the sale price.

Share Sale: If you are selling shares of a company, VAT generally does not apply to the sale itself, as the ownership of the company remains unchanged. However, if the company holds assets, the VAT status of those assets may still be relevant.

b. VAT Registration:

If your business is registered for VAT and you are selling assets, you may be able to recover the VAT you paid on those assets when you initially purchased them. However, you will need to account for VAT on the sale price.

c. Transfer of a Going Concern (TOGC):

In some cases, the sale of a business may qualify as a TOGC, where VAT is not charged on the sale. This typically occurs when the business continues to operate without significant interruption under new ownership.

It’s crucial to seek advice from a tax professional to determine the specific VAT implications of your business sale, as the rules can be complex and vary based on individual circumstances.

2. Capital Gains Tax (CGT):

Capital Gains Tax is a tax on the profit made when you sell or dispose of an asset that has increased in value. When selling your business, you may be liable for CGT on the gains you make from the sale. Here are some key points to consider:

a. Business Asset Disposal Relief (formerly Entrepreneurs’ Relief):

Business owners may qualify for Business Asset Disposal Relief, which can significantly reduce the rate of CGT. As of my last knowledge update in September 2021, the rate was 10% on qualifying gains up to a lifetime limit of £1 million. However, tax laws may change, so it’s essential to check the latest rates and thresholds.

b. Conditions for Business Asset Disposal Relief:

To be eligible for this relief, you typically need to meet conditions such as owning the business for a minimum period and being an officer or employee of the company. Again, consult with a tax advisor to ensure you meet the necessary criteria.

c. Annual Exemption and Reliefs:

CGT also allows for an annual exemption amount, which means that you can make a certain amount of gains each tax year before CGT applies. Additionally, there are various reliefs and exemptions that may apply in specific circumstances.

d. Reporting and Payment:

When you sell your business, you will need to report any capital gains to HM Revenue and Customs (HMRC) and pay any CGT owed within a specific timeframe.

3. Other Considerations:

Aside from VAT and CGT, there are other tax considerations when selling your business:

a. Stamp Duty:

If you are selling shares, Stamp Duty may be applicable if the transaction value exceeds certain thresholds. The rates can vary depending on the value of the shares.

b. Inheritance Tax:

In some cases, the proceeds from the sale of a business may be subject to Inheritance Tax if the owner passes away within seven years of the sale.

c. Double Taxation:

If you are a non-UK resident and are selling a UK business, you may need to consider double taxation treaties between the UK and your home country to avoid being taxed twice on the same income.

In conclusion, selling a business in the UK involves navigating various tax obligations, including VAT and Capital Gains Tax. The specific tax liabilities and exemptions can vary depending on the nature of the sale and your individual circumstances. To ensure compliance with tax laws and to optimize your tax position, it is advisable to consult with a qualified tax professional or accountant who can provide personalized guidance tailored to your situation. Understanding these tax implications is essential for a successful and financially sound business exit strategy.

Do you pay tax on a holding company?

A UK holding company that has income will be subject to corporation tax, but the corresponding subsidiary expense will be deducted. This will reduce its corporation tax.

Subsidiary companies owned by a holding company can pass assets between them tax free. This enables a subsidiary to easily move assets when required. Businesses in a group structure can also surrender tax losses to profit making group companies. This enables the profit-making companies to reduce tax liability.

A holding company structure could allow a trading subsidiary business to be sold tax free. If the holding company has owned at least 10% of a subsidiary company’s shares for 12 or more consecutive months, these shares can be disposed of without a Corporation Tax liability.

This is the Substantial Shareholding Exemption (SSE). The SSE can be useful if the remaining Holding Company plans to reinvest funds in the next venture.

Business Property Relief (BPR) effectively reduces the value of assets which are subject to Inheritance Tax on transfer. Usually, a non-trading investment company i.e., a holding company, would not qualify for BPR.

If a holding company is paired with a trading company within a wider group structure, the full value of the group may be relieved from inheritance tax, including investments.