The Tax Aspects of Selling your Business
How to Maximise Tax Savings 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 tax accountant 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 owners personal tax position.
What Tax Efficient Factors Should you Consider When Selling or Closing your Business?
If you are planning on closing or selling your business, there are several opportunities to withdraw cash from it at lower tax rates. This typically involves your sales proceeds to be subject to capital gains tax instead of income tax. However, there are a few other things you should consider:
- Company Closure
One way to gain a tax advantage 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 Entrepreneurs’ Relief 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.
- 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.
Related: 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 utilize 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.
Related: You can learn more about the basics of Income-tax and NI through our guide: Income Tax and NI basics for beginners.
Video: 7 Steps to Increase the Value of Your Business
Your business value is determined by the decisions and steps that you take towards it’s 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. Although, you might need to adopt measures to build up the right to a termination payment, as 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.
Related: 2020 is a redefining year for the business world. The UK government has introduced several new propositions in their budget. Learn more about what the 2020 budget has to offer you by going through our Budget Summary 2020.
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.