Expert Opinion: Selling Your Business? Why planning ahead matters

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The team from Stockport-based accountancy practice, IN Accountancy, explain some of the tax implications to consider when selling and exiting from your business.

Let’s face it, if you’ve spent years of your life, and taken risk after risk, to launch and scale your small business, which has become your most valuable asset, then every business owner (well, almost every business owner) will be looking for an exit of some sort at some point. 

This might not necessarily be a trade sale – you may be looking to bring your management team into the business with the ultimate goal of them taking over the business via an MBO (Management Buy Out), or you may wish to consider selling to an EOT (Employee Owned Trust).  

In each of these cases, you need a goal, and you need to understand your numbers and the associated tax implications in order to receive the capital exit you desire. 

One of the critical considerations is the Capital Gains Tax (CGT) implication. While this isn’t currently relevant for an EOT exit, it is critical if you sell your asset in a different way. 

Depending on your circumstances, the tax you pay could vary significantly—especially if you qualify for Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief.

Let’s break down how this works using a £2 million sale example. 

Selling Your Business at £2 Million – Current CGT Rates

If you’re selling your business for £2 million today, and you’re a higher or additional rate taxpayer who qualifies for BADR, here’s how the tax works: 

1. With BADR:
   BADR allows you to pay a reduced CGT rate of 10% on the first £1 million of lifetime gains. This is significant if you qualify, as it saves a substantial amount in tax. 

For a £2 million sale: 

• The first £1 million is taxed at 10% = £100,000 
• The remaining £1 million is taxed at 20% = £200,000 

Total Tax = £300,000
This leaves you with £1.7 million in net proceeds. 

1. Without BADR:
   If you don’t qualify for BADR, the entire £2 million gain would be taxed at 20%. 

• £2 million × 20% = £400,000 

Total Tax = £400,000
This leaves you with £1.6 million in net proceeds. 

How much more would you need to sell for to achieve the same £1.7 million net proceeds without BADR?

If BADR doesn’t apply, the entire gain would be taxed at 20%. So, to achieve the same £1.7 million net proceeds, you would need to sell for approximately £2.125 million. This slight increase in the sale price compensates for the higher tax burden without the relief.

Visit the IN Accountancy website for some additional examples considering a higher rate of CGT or a higher business sale value.

Planning Your Exit: Key Takeaways

When it comes to selling your business, it isn’t just about finding a buyer! Planning ahead is essential.  

The first step is to understand what you need in terms of proceeds after tax and other costs.  This then allows you work backwards to see what gross proceeds you need in order to achieve this figure.   

The key question to ask yourself is “how much is enough?” and this is something that your financial advisor can help you determine if you are unsure where to start. 

When undertaking this exercise the difference between qualifying for BADR and not may seem subtle to the bigger businesses out there.   

For a smaller business, particularly those with a number of shareholders, it could mean your headline sale price needs to be hundreds of thousands of pounds higher in order for you to achieve your goals.  

And with CGT rates potentially increasing, those differences could be even more pronounced. 

Whether you’re ready to sell now or planning for a future exit, it’s crucial to get the right advice to maximise your net proceeds.