CC Consulting writes...Selling or transferring ownership of a business is a major financial event that can have complex tax implications. When structuring the disposal of a business in the UK, whether this is through an outright sale or a gift, it is crucial to consider the potential tax burdens that may arise and how to minimise them. This allows you to maximise the net proceeds you receive from the transfer.
What does it mean to transfer business ownership?
Transferring ownership of a business means that the legal rights and responsibilities associated with that business are handed over from one party to another. This constitutes a major transition event for any company.
There are several common scenarios that typically lead business owners to transfer ownership:
- The current owner is ready to retire and wants to pass the business to someone else to continue running it. This may be a family member, partner or new outside party.
- The owner wants to free up time and resources to focus on other business opportunities or personal goals, so is looking to hand over their current company.
- They may sell a stake in the business or transfer majority control in order to raise investment capital for growth or expansion.
- Owners who have taken the business as far as they can may transfer it to new owners who can inject fresh energy and ideas.
- They may decide to transfer the thriving business while it is at peak profitability to maximise the value realised.
- Health issues, financial pressures or other personal factors can necessitate transferring ownership to someone else who can fully operate the business.
Proper structuring of the ownership transfer, as well as timing considerations, can potentially save you thousands of pounds in avoidable tax payments. Here, we’ll summarise the most important tax considerations for financial wellbeing to ensure the tax burden doesn’t outweigh the value realised from transferring your business ownership.
Inheritance tax (IHT) may come into play if you decide to gift your business to a family member or someone else, rather than sell it. Lifetime gifts fall under the IHT rules if they exceed your available nil-rate band. The current IHT threshold is £325,000, which is frozen until 2025/26. Any gifts exceeding this allowance are taxed at 40%. However, business asset relief allows you to gift qualifying business property, and reduce the IHT charge by up to 100%.
To qualify, you must have owned the business assets for at least 2 years prior to transfer. The business should not consist wholly or mainly of investments or investment-type assets. Receiving professional valuation and advice is important, as the relief applies to the value of the gift above the nil-rate band. With careful planning and timing of the gift, you can potentially pass your business on without incurring a major IHT liability.
Capital Gains Tax
Capital Gains Tax (CGT) is a key consideration when selling a business; any gain you make over and above the original base cost of the business assets or shares is subject to CGT. For individuals, the current CGT rates are 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers, up to a lifetime limit of £1 million in gains.
There are some valuable reliefs and allowances that can reduce your CGT liability when transferring a business. For example, you can make use of your annual CGT exemption, which allows you to realise £12,300 in gains tax-free for 2022/23. Entrepreneurs' relief is another important consideration, which taxes qualifying gains made on the disposal of a business at a reduced rate of 10% rather than 20%. To qualify, you need to have held at least 5% of the ordinary share capital of the company for a continuous 12-month period leading up to the sale.
Deferring receipt of the sale proceeds to a future tax year can also minimise your Capital Gains Tax if you have already used your allowances in the current year. Overall, understanding the CGT rules and planning the timing and structure of the business sale appropriately can help legally minimise the tax to pay.
If you are selling shares in a limited company, the company itself may face a corporation tax liability on any capital gain realised on the share transfer. Corporation tax is charged on company profits and gains at the current UK rate of 25%. Unlike for individuals, entrepreneurs' relief does not apply to reduce the corporation tax rate for companies.
However, steps can be taken to minimise the company's corporation tax exposure when planning the disposal of shares. For example, you can make use of any past losses carried forward to offset against gains realised on the share sale. You may also consider implementing a share buy-back, so the company returns profits to shareholders in a more tax-efficient manner prior to the sale.
The transfer of a business is generally treated as being outside the scope of VAT. This means no VAT is typically payable if you sell or gift your business and the new owner continues trading the assets. However, it is important to seek expert guidance, as there are scenarios where VAT could become chargeable.
For example, if the business assets sold or gifted include any stock, VAT may need to be charged if the new owner is not VAT registered. Similarly, if the purchaser or recipient does not intend to operate the business on an ongoing basis after the transfer, it may not qualify as a going concern, so VAT could apply.
VAT may also arise if the new owner plans to fundamentally change the nature of the business model or activities. Notifying HMRC of the transfer is advisable, and as with any tax matters, seeking professional advice to confirm the VAT treatment is advised.
Optimising tax outcomes
Transferring a business to new ownership is a major event that carries potentially significant tax implications if it’s not handled carefully. As discussed here, capital gains tax, inheritance tax, corporation tax and VAT may all need to be considered when structuring the sale or gift of a business in the UK.
The good news is that with proper planning and expert advice, you can take legitimate steps to minimise the tax burden that arises. Although taxes are unavoidable, careful structuring of the ownership transfer can save you thousands of pounds versus an unplanned disposal. With the right knowledge and preparation, you can achieve the best possible tax outcome when selling or gifting your business.