When it comes to selling your business, Capital Gains Tax (CGT) can be a common worry.
Often, we’re asked how entrepreneurs can make sure they keep as much of their hard-earned profit as possible.
Unfortunately, many entrepreneurs overlook CGT until it’s too late, only to find themselves handing over more to HM Revenue & Customs (HMRC) than they anticipated.
So, let’s dive into what you need to know about CGT, the key reliefs available, and how you can minimise your tax liabilities when you decide to sell.
What are Capital Gains Tax (CGT) and BADR?
CGT is a tax on the profit you make when you sell an asset that has increased in value.
In the context of selling a business, this means the difference between what you initially invested and the final sale price.
The CGT rate you’ll pay depends on your overall income and gains for the year.
Currently, it’s 10 per cent for basic rate taxpayers and 20 per cent for higher rate taxpayers when it comes to business assets. *
Now, here’s where Business Asset Disposal Relief (BADR) – previously called Entrepreneurs’ Relief – comes into play.
BADR is designed to encourage business owners like you to sell your businesses and reinvest in the economy.
If you qualify, you could benefit from a reduced CGT rate of 10 per cent on up to £1 million of lifetime gains.
But don’t assume you’ll automatically qualify – you’ll need to meet specific criteria:
- You must have owned the business for at least two years
- Have been a director or employee of the company
- Hold at least five per cent of the shares and voting rights.
If you are missing one of these, you could miss out on a significant tax saving.
*CGT on property assets often have different rates.
Rollover relief and tax minimisation strategies
Another tool in your tax-saving arsenal is Rollover Relief.
This relief allows you to defer paying CGT if you reinvest the proceeds from the sale of your business into a new qualifying business asset.
The idea is to encourage continued investment in the economy by allowing you to roll over the gain into your next venture.
However, it’s important to understand that this is only a deferral – eventually, CGT will become due when you sell the new asset unless you roll over again.
So, how do you minimise your CGT liabilities?
First and foremost, early planning is key.
Don’t wait until you’re in the final stages of a sale to start thinking about CGT.
By planning ahead, you can structure the sale to maximise tax efficiency.
For example, consider using your spouse’s CGT allowance by transferring shares or assets to them before the sale.
This can effectively double the tax-free allowance, reducing your overall tax bill.
Another strategy is to ensure you meet all the eligibility criteria for Entrepreneurs’ Relief.
This might mean holding onto your business for a little longer or adjusting your involvement in the company to ensure you meet the two-year requirement.
Additionally, making pension contributions can lower your taxable income, potentially reducing the rate of CGT you’ll pay.
If you’re thinking of passing on your business to family members or setting up a trust, these can also be effective ways to manage and reduce CGT liabilities.
However, these options require careful consideration and professional advice, as they can complicate the tax picture.
Common Pitfalls to Avoid
There are a few common pitfalls that you must be aware of if you want to avoid unnecessary tax headaches.
The first is missing deadlines or failing to meet the specific criteria for reliefs like BADR or Rollover Relief.
These rules are strict, and HMRC won’t hesitate to deny you relief if you don’t tick every box.
Another major pitfall is neglecting to seek professional advice.
CGT is complex, and the rules are constantly changing.
A good tax adviser will help you navigate these complexities and ensure you’re taking full advantage of the reliefs available to you.
This is not an area where you want to cut corners – professional advice is worth its weight in gold when it comes to minimising your tax bill.
