Tips to Save Tax When Selling a Business?

What Do You Need To Know When Selling Your Business?

Successfully selling a business requires you, as business owners, to take a multi-dimensional approach. Before initiating the sale process, you need to prepare and get everything in order. You should commence your preparations by making sure that your accounting records, books and legal documents are in order. You should then consult a financial advisor and get a business valuation done.  

When preparing the sale of a business, owners also need to prioritise their post-sale financial future in order to avoid costly mistakes and get the best possible outcome. Speaking to your personal tax accountant service can help you understand the personal and corporate circumstances that may impact you, as the owner, from the sale. Your tax advisor can also help you understand your options regarding the structure of the sale and the potential impact it can have on an owner’s personal tax position.

What Tax-Efficient Factors Should You Consider When Selling or Closing Your Business?

If you are planning to close or sell your business, there are several ways to withdraw cash from it at lower tax rates. This typically involves your sales proceeds being subject to capital gains tax instead of income tax. However, there are a few other things our tax accountants recommend that you should consider: 

• How to Master the Art of Buying and Selling a Business?
• Reduce Corporation Tax Bill Using Simple Practices

Company Closure

One way to save tax when closing your company is by retaining profits in your company and winding it up so that the accumulated profits are charged to capital gains at the Relief for Entrepreneurs’ rate of 10%, instead of income tax. 

In order to use this process, you cannot be involved in a similar business within the two years following the winding up. If you are, then the tax advantage will be cancelled due to the various anti-avoidance rules (‘phoenixing’) put in place by the government. These rules were introduced in 2016 to prevent director shareholders from gaining tax advantages by using such methods. 

• Company Closure Tax Efficiently
• Entrepreneurs’ Relief: This is What you Need to Know
• Winding-Up Petition: What if you Receive the WUP Notice?

Lower-income Alternative

Due to the rules introduced in 2016, you might have higher taxes levied on you when selling your business. One way to alleviate this is to sell your company’s assets and keep the payments you receive in the company. This gives you the option to enjoy cash withdrawals during your retirement when it’s expected that your income will fall under lower income tax rate bands. However, it is possible that the government might add extra measures to prevent this.

• Capital Gains Tax is a tax levied on the profit you earn when selling an asset that has increased in value. Learn more about CGT in our guide

Long-term planning

Another method of mitigating your taxes when you sell your company is through long-term planning. One way to do this is to utilise the tax and NI-free allowance for employment termination payments. These rules were updated recently, in 2018 for tax and in 2020 for NI, so it is unlikely that they will be subject to more changes in the near future. The updated tax and NI-free employment termination payments allow for payments up to £30,000.

• You can learn more about the basics of Income-tax and NI through our guide: Income Tax and NI basics for beginners. 

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Your business value is determined by the decisions and steps that you take towards its improvement. Watch this video to learn more.

Redundant Directors

Redundancy of directors might not be a conventional tax-saving method. However, if you don’t work for a successor business when you sell or wind up your company, you can use the tax and NI-free allowance mentioned above. However, you might need to adopt measures to build up the right to a termination payment, as the director’s rights are more tenuous than those of other employees. 

Define- Successor Business: A successor business is created after the sale or merger of an existing business. The newly created company can continue the previous company’s operations, keep selling its products and services and operate in the same location. 

Tip: Anti-avoidance rules do not apply to the termination of employment payments. You can enjoy substantial tax breaks even if you do similar business, by yourself or for others, even within the two years after selling and winding up your firm.

Director’s Right to Redundancy Pay

An employee’s statutory redundancy payment hinges on their salary and how long they have worked in the company. However, for a director to be eligible for a redundancy payment, they must have an employment contract and be paid a salary. This usually becomes an issue because frequently director shareholders don’t have an employment contract, as it enables them to avoid National Minimum Wage and pensions auto-enrolment rules.

Tip: Make provision for a contractual payment in the director’s employment contract to include a clause which links the amount payable to your overall income, salary, benefits and dividends. 

• Payroll can become complicated; our payroll accountants have curated an in-depth payroll compliance guide to help businesses that are unsure about how this works.

Clear House Accountants are professional Accountants in London who provide holistic solutions to businesses to help them manage their finances. Our accountants ensure that their clients have the right tools and resources to grow their business faster while saving money.