Timing is everything, especially when it comes to selling your business and navigating the intricate landscape of Tax. By strategically planning the sale, you can get the most out of available exemptions and reliefs, potentially saving a significant portion of your hard-earned profits. Here we will explore into the importance of timing and examine the figures and rates associated with exemptions and reliefs.
Understanding tax implications for different business structures
Whether you operate as a limited company, sole trader or in a business partnership, the tax implications vary. Limited companies face the prospect of paying Corporation Tax on the profits of a trade and asset sale, with further personal tax charges for shareholders accessing the funds. In a share sale, the shareholders will have Capital Gains Tax liabilities. Sole traders and business partnerships will also pay Capital Gains Tax. The structure of your business will influence the tax and amount of tax you have to pay.
Capital Gains Tax: Calculating the impact on sales profit
Capital Gains Tax (CGT) is based on the profits generated from selling your business, not the entire sale amount. For instance, if you purchased your construction business for £230,000 a decade ago and you sell it today for £350,000, you pay CGT on £120,000 (the amount you gained).
The current rates of CGT for share disposals are 10% for gains within an individual’s available basic rate band, and 20% for gains exceeding this.
Exemptions
To highlight the significance of timing, the annual exemption for Capital Gains Tax in the year 2021/22 was £12,300. In the year 2022/23 the exemption was £6,000 and from April 2024 it is being reduced to £3,000. Any gains within this limit are not subject to CGT. Timing the sale to make the most of this annual exemption can significantly impact the amount of tax you need to pay.
Business Asset Disposal Relief (BADR)
Formally known as Entrepreneurs’ Relief, BADR offers a potential lifeline for tax relief when selling your business. If you qualify for BADR, a reduced CGT rate of 10% can apply. This relief is capped at £1 million for gains made throughout your lifetime. Where you exceed this lifetime limit, standard CGT rates will apply which is another reason why timing and planning are so important.
To make a claim for BADR, you must have owned your trading business for at least 2 years before selling it. There are other specific conditions which you must meet to be eligible for the relief.
Summary
The morale of this is timing plays a pivotal role in a successful business sale, influencing not just financial gains but also navigating the world of tax. By comprehending the implications of Capital Gains Tax, making the most of annual exemptions, and considering the potential advantages of Business Asset Disposal Relief, you can strategically plan your sale to optimise returns. It’s essential to stay informed, adapt to evolving tax landscapes, and bear in mind that, in the world of business sales, timing is of utmost importance.
Mark Holt & Co