Capital v income
The first question to answer is whether you are receiving capital or income. In the UK, capital gains are generally taxed at lower rates than income.
Generally, if you sell your business you will be treated as receiving capital not income. However, there are some exceptions, two of the most significant being:
If you did not pay full value for your shares in your company; or If you stay on with your business after selling your business.
In either case, part of your payment may be treated as income, not capital, and so be subject to income tax and, possibly, social security (National Insurance) contributions.
After dealing with any income (or if there isn’t any income), all that remains should be treated as capital.
When you pay
Capital gains tax is payable on a tax - year (6 April to 5 April in the next year) basis. Tax for one tax year is payable by 31 January of the following year – so you could have nearly 21 months to pay.
Less good is that, if part of the payment is deferred, you may have to pay tax at the time of sale (on the whole amount you may receive), even on the part to be paid later. If future payments depend on future events (for example next year’s profits), you need to value your right to the possible payment and pay tax on that value.
However, if you are selling your business to a company, and you receive part of the payment in shares or loan notes, you may be able to delay the tax on those parts until you sell the new shares or are paid out on the loan notes.
Anything that delays paying tax can be helpful, especially if you don’t receive enough cash to pay the tax. However, this is not always the case as, when you sell those shares, or are paid out on the loan notes, the buyer’s company may not be your personal trading business and so you might lose entrepreneurs’ relief (see below). It may be a case of choosing to pay later but to pay more tax.
How much to pay?
You will pay tax on the gain you make on selling your business – effectively, the amount you receive for your business less your capital costs - and you should make sure that you keep good records to make sure you can claim all the deductions you are allowed.
If you are selling a trading business in which you have been working, you may be able to claim “entrepreneurs’ relief” which gives a special reduced rate of tax.
What should you do?
You have important decisions to make when you sell your business and you should take advice early. A good adviser can help you plan your sale, especially if you will be receiving deferred payments or you are intending to remain with the business for a time after sale, to ensure that you do not pay too much tax or pay tax earlier than necessary.