Taxation on a Business Sale
For many years in the United Kingdom there has been a system of capital gains tax which levies tax on profits made on capital sales. There has also been for many years a system of relief designed to give a lower tax charge on the sale of business assets.
Never however has the taxation regime relating to the sale of business assets been more generous than at this current time.
Currently capital gains tax is charged at 18% for transactions involving basic rate tax payers and 28% for transactions involving higher rate tax payers. However if the sale of assets can be proved to be the sale of a business asset then the effective rate if capital gains tax is reduced to 10%. This method of calculating capital gains tax on business assets is known as “entrepreneurs relief”. Although there can be some complications in calculating the relief such as a sale that involves some business and some non-business assets, it is generally a relatively simple relief to understand. Basically if a UK tax payer has owned a business asset for at least twelve months then disposes of that asset and makes a capital profit then the tax rate is effectively 10%. This relief applies to the sale of shares in private trading companies, the sale of freehold commercial premises owned outside but used in the business provided that this asset is part of the business rather than merely a business asset or simultaneously when the business is disposed of. The relief however is not available to limited companies disposing of business assets and is only available to individuals.
Apart from the effective tax rate, one of the things that makes entrepreneurs relief so exciting is the fact that each UK tax payer has a lifetime allowance of £10 million as far as this relief is concerned. What this means is that UK tax payers can individually create gains on the sale of business assets up to £10 million at an effective rate of 10%. By its definition as a lifetime allowance the relief is accumulative so that in theory a business owner could sell ten businesses over a period of time at a gain of £1 million each time and only pay an effective rate of 10% on each transaction. When you consider that the most successful business owners have personal tax rates are often 40% and in some cases 50%, it is clear to see the advantage of using the entrepreneurs relief wherever possible.
It is not a requirement that the business owner needs to sell the whole of the business in order to obtain entrepreneurs relief. It is perfectly permissible for a business owner to dispose of part of the business and take advantage of the relief but it does need to be an identifiable part of the business and not merely the sale of business assets.
It is evident therefore that whilst the current personal tax rates prevail in the United Kingdom, it makes absolute sense for any owner of business assets who wishes to dispose of some or all of these can plan a strategy to take advantage of entrepreneurs relief.
Note. Tax rates and relief correct at time of writing. Please check with your advisors to check on current taxation rates and reliefs.