05 Oct, 2020 10:11 AM
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6 Tax Aspects to Consider When Selling a Business

Here’s what you need to know when selling or closing your business and how to maximise tax savings during the closure.

While reading the news you may come across a lot of stories about businesses being sold. But why do people sell the businesses that they put so much effort into? Well, they do it when they see the potential value of selling the business in exchange of profit. Considering that you might want to sell your business and earn a bulk amount of profit from it. But, if you’re not careful, you can end up with less than half of the purchase price in your account, after paying all the taxes. 

Thus, there are some important factors that you need to consider when selling your business and with skillful planning you can possibly alleviate or defer at least some of the taxes. Taj Accountants has come up with some interesting factors that might help you in the process of selling your business and saving some tax for you. 

Here Are 6 Tax Efficient Factors to Consider When Selling Your Business: 

Capital taxation might be a killer factor while winding up your business. Many London Accountants suggest you to be mindful about taxation issues and be proactive. Here's how you can withdraw cash from your business closure at lower tax rates:

1. Entrepreneurs' Relief

When you earn the profit from winding up your business, instead of fetching the cash to your personal bank account, retain the profit in your company. What it will do is, it won’t be charged from your income tax, insead the accumulated profits will be charged to capital gains at the Entrepreneurs’ Relief rate of 10%. Individuals' can claim a lifetime allowance of £1,000,000 of gain that will be taxed at a reduced rate of 10% (reduced from £10 million in the 2020 Budget on 11 March 2020).

But you have to keep in mind that, if you adopt this process then you won’t be able to get involved in any similar business for the next 2years. In case if you do, then it’ll fall under the various anti-avoidance rules and your tax advantage will be cancelled. 

2. CGT Roll-Over Relief 

This tax relief allows Capital Gain Tax to be deferred if the gains are reinvested in new business assets. The deferral is achieved by deducting the chargeable gain from the cost of the new asset. In case of Roll-over relief, CGT will only become payable when these new assets are sold.  

For example, if you sell a business asset on 1 January 2010 for £300,000 which resulted in a chargeable gain of £80,000 and if you replace the old asset with a new asset costing £350,000; you can make a claim to defer the gain you have made. The amount deferred (in this case £80,000) is rolled over and reduces the base cost of the new asset purchased. So the base cost of the new factory will be £270,000 (being cost of £350,000 less rolled over gain of £80,000). Small business accountants in London can help you estimate the accurate amount for your roll-over relief. 

3. CGT Hold-Over Relief 

On the contrary to Roll-Over Relief, Hold-over relief also known as Gift Hold-Over Relief can be used to defer CGT if you are giving away your business rather than selling it. For example, giving out your business to your children or spouse. In this case, CTG is automatically deferred on the process of transferring the assets.

It’s a chargeable gain which is not taxed when it arises, but instead it’s held over until disposal of the asset by its new owner or disposal of the new asset against which the gain has been held over.

4. Lower-Income Alternative

You can reduce the higher taxes levied on you when selling your business by selling your company’s assets and keeping the payments you receive in the company. By doing this, you get the option to withdraw cash during your retirement. It occurs when it’s expected that your income will fall under lower income tax rate bands during that time. This is considered to be a lower-income alternative. 

5. Long Term Planning

You can also alleviate taxes through long-term planning. Long-term planning can play an important role for any eventual business sale. You can apply this by utilizing the tax and NI-free allowance for employment termination payments. The rules for these were updated in 2018 for tax and in 2020 for NI-free employment termination payments, which allow you for payments up to £30,000. Along with tax planning opportunities, you can also look for how you can ‘groom' the business for sale, maximising its likely sale value. You can contact your local accountants in London to help you out. 

6. Director’s Redundancy

If you’re a director, you can be redundant the same way as any other employee. However, managing a director's redundancy is complicated by the fact that a director usually has several legal roles, also redundancy of directors might not be a conventional tax-saving method. But you can use the tax and NI-free allowance if you don’t work for a successor business, when selling or closing up your company. Even though you might need to adopt some measures to create the right to a termination payment, as director’s rights are considered to be more insubstantial than those of other employees. Company directors made redundant on or after 6 April 2017 can receive a maximum of £489 per week, capped at £14,670 (for 20 years of service)

How can we assist you?

At Taj Accountants we offer a wide range of accounting and taxation advice to corporates, as well as individuals. We take every case with a unique approach and aim to maximize your profit. If you’re facing any taxation related issues, you can always contact us and visit our blogs for more financial information.

DISCLAIMER: The purpose of the blog is to provide information and insight regarding the situation. The readers must contact experts before making any decisions based on the information. We highly appreciate you to contact Taj Accountants for further assistance.

FAQ

How can you be eligible for the Entrepreneurs’ Relief?

To be eligible, as a shareholder you must have a 5% or more shareholding, and have been involved for a year or more with a company as an employee or director.

What is a Successor Business?

The business that is created after the sale or merger of an existing business is called a successor business. The newly created company can continue the previous company’s operations, keep selling its products and services and operate in the same location.