Tax & Admin

What Taxes Are Payable When Selling A Business?

Allison S Robinson | 14 October 2022 | 1 year ago

What taxes are payable when selling a business

The sale of a business is a taxable event, but what taxes are payable when selling a business? The most common taxes due when selling a business are Capital Gains Tax, Income Tax, and Inheritance Tax, however the type and amount of tax payable will depend on several factors including he type of business being sold and the taxable profit.

For most small business sales, the seller must pay capital gains tax and inheritance tax on the profit from the sale, and the buyer may be subject to income tax on the purchase price. Depending on the structure of the sale, other taxes may also be payable.

Read on for a summary of the different taxes that may apply to the sale of a business in the UK, as well as some tips on how to minimise the amount of tax payable.

Capital Gains Tax

A capital gains tax is a tax on the profit you make when you sell something for more than you paid for it. The amount of tax you pay depends on how much profit you make, and whether or not you’re a basic rate or higher rate taxpayer.

Capital gains tax is payable on the profit from the sale of a business, also referred to as selling assets. The profit is calculated as the difference between the sale price and the “base cost” of the business. The base cost includes the cost of any assets used in the business, plus any costs incurred in acquiring or setting up the business.

You pay Capital Gains Tax if you’re a self-employed sole trader or in a business partnership. Other organisations like limited companies pay Corporation Tax on profits from selling their assets.

You might be able to delay or pay less Capital Gains Tax by claiming other reliefs, allowances, and costs related to the asset.

How To Pay Capital Gains Tax

Capital gains tax is payable on any profit that is made from the sale of the business. If you are a UK resident, you will need to pay capital gains tax on the sale of your business through your self-assessment tax return.

The tax return must be filed within 12 months of the end of the tax year in which the sale took place. The rate of capital gains tax depends on a number of factors, such as the type of business being sold and the amount of profit made.

Income Tax

Income tax is payable on any money that is earned from the sale, such as salary, dividends, or interest. The rate of capital gains tax depends on a number of factors, such as the type of business being sold and the amount of profit made.

If the sale of a business results in a capital gain, the buyer may be subject to income tax on the purchase price. This is because the purchase price includes the value of any goodwill or other intangible assets that are part of the business.

How To Pay Income Tax On Sale Of Business

If you are a UK resident, you will need to pay income tax on the sale of your business through your self-assessment tax return. The rate of income tax depends on the individual’s personal circumstances but the tax return must be filed within 12 months of the end of the tax year in which the sale took place.

Inheritance Tax On Sale Of Business

Inheritance tax is a tax that is payable on the value of your estate when you die. When you sell your business, any profit you make is subject to Inheritance Tax if you die within seven years of selling your business.

In the UK, inheritance tax is payable on businesses that are worth more than £325,000. The rate of tax will depend on how much the business is worth and who inherits it. If the business is inherited by a spouse or civil partner, there will be no inheritance tax to pay but if the business is inherited by someone else, they may have to pay inheritance tax at a rate of 40%.

The rate of tax depends on the size of your estate and whether you’re a UK resident. If you’re not a UK resident, you may still be liable for Inheritance Tax on your business if it’s located in the UK.

How To Pay Inheritance Tax On Sale Of Business

Businesses are complex assets and there are many ways to value them for Inheritance Tax purposes.

The most common approach is to value the business as a going concern, which takes into account factors such as goodwill, future earnings potential and the market value of assets but other methods may be used in certain circumstances. For example, if your business is owner-operated, the valuation may be based on the net worth of the company, which includes both tangible and intangible assets.

Inheritance tax can be avoided if the business is passed down to children or grandchildren. This can be done through a process known as “business relief”. Business relief allows businesses to be passed down to the next generation without being subject to inheritance tax. This can help to ensure that businesses remain in family ownership for many years to come. Inheritance tax can be a complex area and it is always advisable to seek professional advice before making any decisions about how to pass on a business.

The Inheritance Tax team at HMRC can help you value your business for tax purposes and they can also provide guidance on how to minimise your liability through planning and use of reliefs.

Other Taxes On Sale Of Business

Depending on the structure of the sale, other taxes may also be payable. For example, if the business is sold as a going concern, stamp duty may be payable on the transfer of assets such as property, plant and equipment. If the business is sold through a share sale, stamp duty may also be payable on the transfer of shares.

How To Pay Other Taxes On Sale Of Business

If you are a UK resident, you will need to pay any other taxes that are due on the sale of your business through your self-assessment tax return. The tax return must be filed within 12 months of the end of the tax year in which the sale took place.

Do You Pay Tax On Business Assets?

do you pay tax on business assets

Simply put, assets are anything that your business owns that has value. That value can be financial, such as cash or investments, or it can be physical, such as inventory or equipment. In some cases, it can even be intangible, such as patents or copyrights.

No matter what form they take, assets are a vital part of any business. They provide the resources you need to keep your business running and grow over time.

When it comes to paying tax on business assets, you may have to pay Capital Gains Tax if you make a profit (‘gain’) when you sell (or ‘ dispose of ‘) all or part of a business asset.

Business assets you may need to pay tax on include: land and buildings fixtures and fittings plant and machinery, for example a digger shares registered trademarks and your business’s reputation You’ll need to work out your gain to find out whether you need to pay tax.

What Is Business Asset Disposal Relief?

Business asset disposal relief (formerly known as entrepreneurs’ relief) is a tax relief that can be claimed on the sale of a business. The relief allows you to pay a reduced rate of capital gains tax on the profit from the sale.

To qualify for the relief, you must have owned the business for at least 12 months prior to the sale. The relief is not available if you sell shares in a company or assets that are not part of a business.

If you qualify for the relief, you will be able to pay capital gains tax at a rate of 10% on the first £1 million of profit from the sale. The amount of profit that qualifies for the relief is limited to £10 million per person.

How To Claim Business Asset Disposal Relief

To claim business asset disposal relief, you will need to include the relief in your self-assessment tax return. The tax return must be filed within 12 months of the end of the tax year in which the sale took place.

Professional Advice When Selling A Business

There’s usually a lot of planning that goes into selling a business. If you’re thinking of selling yours, there are a few things you should keep in mind to ensure that you get the right professional advice.

  • You will need to get an accurate valuation of your business. This will help you know how much it’s worth and set a fair price to ensure you’re not underselling or overpaying for your business.
  • You need to understand the tax implications of selling your business. This is especially important if you’re selling to a foreign buyer, as there may be different tax rules that apply. An accountant can help you with these things.
  • You need to make sure all your legal and financial paperwork is in order. This includes things like business licenses, contracts, and employee agreements. A solicitor can help you with these things.
  • You need to find a good business broker. A business broker can help you navigate the process of selling your business and ensure that everything goes smoothly.
It can take months or even years to sell a business, so you need to be patient when selling your business, but following these tips will help you get the best possible price and avoid any stressful surprises.

Who Can Value A Business?

When it comes to business valuations, there are several factors to take into account. For business owners, the most important factor is usually the sale price but because business sales can be complex transactions, the final price can vary widely depending on many factors.

Whilst all sales should consider the size of the business, its profitability, and its competitive landscape, it’s also important to work with a business valuation expert who can help you to get the most accurate valuation for your business. Businesses are often valued by business brokers or accountants when they are put up for sale, but also other professional input may be needed to value a business for other reasons.

For example, bankruptcy lawyers may need to value a business to determine how much the business is worth to distribute its assets among creditors.

Insurance companies may need to value a business to calculate the amount of money that should be paid out in the event of the business’s destruction.

Tax authorities may need to value a business to calculate inheritance taxes or estate taxes. While many different professionals may need to value a business, the most important thing is to choose someone with the experience and expertise necessary to provide an accurate valuation.

Conclusion

The sale of a business is a taxable event and depending on the value of the business being sold, the business owner or purchaser may be liable for significant taxes.

One of the most important aspects of business sale planning is considering the tax implications of the sale so you are not hit with a large, unexpected tax bill. It is therefore important to seek professional advice to structure a sale transaction to ensure that all taxes due are paid and to minimise the tax liability where possible.

The business owner will be liable for capital gains tax when selling a business on any profit made from the sale. If the business is sold as a going concern, stamp duty may also be payable on the transfer of assets such as property, plant, and equipment. If the business is sold through a share sale, stamp duty may also be payable on the transfer of shares. Other taxes that may be due include inheritance tax if the business is passed down to family members, and value-added tax if the business is VAT registered.

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