Even if you’re not planning on selling your business for some time, it’s wise to have your exit strategy planned well in advance. As with many other aspects of running a business, the tax implications resulting from the sale are particularly relevant and should be considered carefully during the planning process.
What is Capital Gains Tax?
The primary tax liability associated with the sale of any business or assets is Capital Gains Tax (CGT). This is the tax you pay on the profit made from the sale of your business. For example, if you sell your business for £100,000, having bought it yourself for £70,000, your Capital Gains liability is £30,000.
At the present time, all individuals have an annual tax-free allowance of £10,600 a year, so Capital Gains Tax only applies on profits made above this threshold. In the example above the total amount that would be subject to Capital Gains Tax would be £19,400, assuming that the individual has not made any other gains in that tax year. If the business only sold for £80,000 then the individual would not have to pay Capital Gains Tax on the sale, as their profits from it would be just below the exemption threshold.
Capital Gains Tax rates
Currently, the basic rate tax paid on capital gains made since 23rd June 2010 is 18% for all gains up to the basic rate threshold. A higher rate of 28% is payable on any gains made above this threshold.
Reducing your Capital Gains Tax with Entrepreneurs’ Relief
A special Entrepreneurs Relief may be available to you if you are a sole trader or a partner in a trading business. In cases where Entrepreneurs’ Relief applies, capital gains are taxed at the lower rate of 10%. From 23rdJune 2010, the maximum lifetime limit for the amount on which you can claim Entrepreneurs’ Relief is £5 million.
Other types of Capital Gains Tax relief
When planning a successful exit strategy, your aim is to maximise the profitability of the sale while minimising the amount of Capital Gains Tax liability. By looking into what types of relief you may be eligible for and adjusting your long-term business strategies accordingly, you can significantly reduce the amount of Capital Gains Tax you pay, and thus increase the overall profitability of selling your business. Below is a quick overview of two of the reliefs available.
Business Asset Rollover Relief - This type of relief is generally available if you sell one asset and then replace it with another of the same type. To be eligible for Business Asset Rollover Relief you must invest in the new asset within three years of the sale.
Incorporation Relief - Incorporation Relief may apply if you transfer your business to a company in return for shares. If this is the case, then no tax will be due on the transfer until such time as you sell the shares.
More information on Capital Gains Tax reliefs and details on who is eligible are available at http://www.hmrc.gov.uk/cgt/businesses/reliefs.htm#1 .
By carefully planning your exit strategy in advance, with full consideration for the tax implications involved, you can optimise the gains you will make when it’s time to make your exit.
For expert advice contact Sleigh and Story on01484 723783.
