Selling your company? Here’s Panthera’s guide to entrepreneurs’ relief on capital gains tax
Thinking about selling up?
In this article, we’re going to look at three different things in relation to the tax you pay when selling a company. The first is about the “type” of sale, the second is about how the tax paid on the sale depends on how it was sold, and the third is about how much tax will be due and when you have to hand it over to HMRC.
Asset and goodwill sale versus company share sale
A company share sale is when you sell the ownership of the issued shares of your business to a buyer. All of your company’s assets and liabilities are included within the share sale. If your company has finance facilities (like an overdraft, a loan or assets on hire purchase), your buyer will be normally expected to settle all of these facilities on the day of completion.
An assets and goodwill sale is different. You still own the shares.
But an assets and goodwill buyer only wants a specific part of your business - normally valuable things like a hit product or service you offer, the infrastructure built to deliver that product or service, the customer database, related intellectual property, and more.
So, let’s say your business did X, Y, and Z. The buyer only wants your Z trading and you agree to sell it.
Your buyer will make you agree to restrictive covenants which mean you, your company or any other business that you and your company might have shares in won’t be able to compete against your buyer. You’re essentially out of the Z marketplace, normally for between 3 to 10 years.
Your business would still be able to do X and Y after the sale had taken place.
For the purposes of this piece, let’s say that you agree to sell your company or your assets and goodwill for £500,000. The £500,000 will be paid like this:
• £275,000 on the day of completion,
• £75,000 in month 3,
• £75,000 in month 6, and
• £75,000 in month 9
Most company sales and asset & goodwill sales have these types of split payment structures. The way solicitors refer to it is “initial consideration” for the first payment and “deferred consideration” for the others.
What you pay in tax
If you’re selling the assets and goodwill of your business, think of the sale as being one massive purchase from your company. Sometimes, you’ll need to charge VAT on your assets and goodwill sale but other times not – give us a call and we’ll give you the best advice on whether that applies in your circumstances or not.
On the day of completion and on the three subsequent pay dates, your company would, if profits are there, be liable to pay corporation tax on each tranche of money. Let’s say you received your £500,000 all in one financial year. At the current rate of 19%, your company would incur a £95,000 corporation tax liability if it had not made losses in other places to offset the amount.
With a share sale, it’s different. As long as you own more than 5% of the shares in your company (including sole traders and partnerships), entrepreneurs’ relief on capital gains tax applies. If that’s you, you only pay tax of 10% on the sale.
It doesn’t matter when you’re paid the money, other income you’ve earned during a tax year, or even if it straddles tax years – you only pay 10% tax on the money you actually receive (and you can even deduct related expenses including solicitors’ and accountants’ bills to bring your tax down further). (1)
When you pay the tax
If yours is an asset and goodwill sale, you pay the corporation tax (if due) according to the financial years in which your company received the cash.
In our example, let’s say you got the big first payment and the first small one in FY18 and the second and third small ones in FY19. And let’s say that, in both years, the money your company received from the sale of the assets and goodwill was on top of an overall trading profit your company had made.
The corporation tax on the £350,000 will be due 9 months and 1 day after the end of FY18 and the corporation tax on the £150,000 will be due 9 months and 1 day after the end of FY19.
If it’s a company share sale, the tax you pay on the money you actually receive from the sale is paid when your self-assessment bill is due. So, if you sold your business in July 2017, your personal tax year end is April 2018. You’d then be liable to pay your entrepreneurs’ CGT on that money on January 31st, 2019.
If the money you’re paid in instalments goes into the following tax year, then you pay the CGT at the next self-assessment deadline, in this case January 31st, 2020.
And finally, what if I’m promised the money but don’t get it all?
You only pay either corporation tax or entrepreneurs’ CGT on the money you actually receive. If the buyer goes bust or finds another reason not to pay you, you (or your company) don’t pay tax on money you’ve not received.
Want to know more
Panthera can help with every accounting aspect related to selling your business. To find out more, call the team on 01235 768 561 or email firstname.lastname@example.org.
(1) There is a lifetime limit on entrepreneurs’ CGT of £10m. Once you’ve passed that limit, you pay capital gains tax at the normal rate which, at time of writing, is 20% on business disposals.