Tax-Efficient Strategies for Selling Your Business

Planning for a Business Sale

Careful planning is essential for business owners looking to retire or transition ownership. Ideally, planning should begin at least two years before the sale to optimize tax payments and preserve eligibility for Business Asset Disposal Relief (BADR), if applicable. The best approach depends on your financial goals:

• Minimizing risk and upfront tax liability – A full cash sale with BADR is often the most efficient option.
• Spreading capital gains tax (CGT) payments – Loan notes can defer tax liabilities.
• Maximizing potential returns – Earn-outs may increase overall proceeds but carry more risk.

Understanding Business Asset Disposal Relief (BADR)

To qualify for BADR, the business must be a trading company (or the holding company of a trading group), and the selling shareholder must own at least 5% of the company’s ordinary shares for at least two years before the sale. These shares must also provide:

• At least 5% voting rights
• 5% of profits available for distribution
• 5% of assets upon winding up
• 5% of proceeds upon sale

BADR reduces CGT to 10% on the first £1 million of lifetime gains (rising to 14% in 2025/26 and 18% in 2026/27). This is significantly lower than the standard 24% CGT rate for higher-rate taxpayers. If the gain exceeds £1 million, the excess is taxed at the full rate. BADR claims must be submitted within one year of the 31 January deadline following the tax year of sale.

Cash Consideration and Deferred Payments

If a business is sold for cash, CGT is due in the tax year of completion—meaning that payments made in installments do not defer the tax liability. Sellers may need to pay CGT by 31 January following the tax year of sale, even if not all cash has been received. However, HMRC may allow tax to be paid in installments over at least 18 months if structured correctly.

Using Loan Notes to Defer Tax

Loan notes (deferred payments in the form of corporate bonds or shares) allow CGT to be postponed until the notes are redeemed or sold. However, BADR is typically lost if loan notes are used, as they do not qualify as chargeable assets for CGT purposes. The CGT rate applied at the time of loan note redemption may be different from the current 24% rate.

An election can be made to trigger CGT immediately, allowing the seller to claim BADR on the gain in the tax year of sale. If making this election, it is important to ensure that sufficient funds are available to pay CGT on both cash and loan note proceeds by 31 January following the sale year.

For non-qualifying loan notes (e.g., those redeemable within six months or interest-bearing), tax is deferred until redemption, but BADR cannot be claimed.

Earn-Outs: Tax on Contingent Payments

When part of the sale price is dependent on future business performance, CGT is initially calculated based on a reasonable estimate of the earn-out value. Additional payments received later are treated as separate assets, and BADR may not apply to these future amounts.

For example, if an earn-out agreement states that a seller will receive 5% of the company’s net profit after tax, this future right has value and qualifies for BADR in the sale year. However, when the cash is received later, it is treated as a separate asset and is taxed at the full CGT rate.

If earn-outs are received in shares rather than cash, CGT can be deferred until those shares are sold.

Tax Planning for Couples

For married couples, transferring shares to a spouse before the sale can double the BADR limit to £2 million, provided all qualifying conditions are met.

Final Thoughts

Selling a business requires careful tax planning to minimize liabilities and maximize returns. Understanding how cash payments, loan notes, and earn-outs affect CGT is crucial for making informed financial decisions. Seeking professional advice early can help structure the sale in the most tax-efficient manner.

Additional Resources:

• HMRC Capital Gains Tax Manual – CG63950 to CG64171
• HMRC Help Sheet HS275

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