How to pay less tax when selling your business: share sale, BADR and cash in the company

How much tax will you pay when you sell your company, which taxes apply, and how do you get the bill down? The short answer is that it depends almost entirely on how the sale is structured. A share sale usually leaves you with one tax to think about, capital gains tax, and there are reliefs and structuring choices that can reduce it. An asset sale can trigger tax at the company level and again when you take the money out. This guide works through the structure first, then the taxes, then the three things I would consider to pay less.

Share sale vs asset sale

When you sell your company you need to agree with the buyer how to structure the deal. The two main options are a share sale (a share purchase from the buyer's side) and an asset sale (an asset purchase).

In a share sale, you sell the entire limited company by selling the shares that own it. You, as the person holding the shares, are the seller, and the buyer is buying the whole company. Think of it as a basket of fruit: the buyer takes the basket and all the fruit inside it.

In an asset sale, the seller is the company itself, not you. The buyer is only buying certain assets, certain pieces of fruit from the basket, and leaving the basket and the rest of the fruit behind with the company, which still belongs to you.

Notice who the seller is in each case. In a share sale it is you personally. In an asset sale it is the company. That single difference is what drives the tax position, because the tax follows whoever receives the money.

From a liability perspective, it is typically preferable for the seller to do a share sale. It is a cleaner break. You hand over the entire company and you are simply left with money. With an asset sale you are still left with the limited company and whatever assets were not sold, including known and possibly unknown liabilities that were not expressly transferred to the buyer. You then have two further problems: how to extract the sale money from the company to yourself, and what to do with a company that has effectively stopped trading because it has sold its most important assets. Neither problem exists on a share sale, because the company, and everything in it, has gone to the buyer.

The structure is not purely the seller's choice. Buyers often have their own reasons for preferring one route over the other, so this is usually the first real negotiation in the deal. The point for now is that the structure you agree determines which taxes you will face, so you need to understand the tax position before you agree it, not afterwards.

What taxes do you pay when selling a business?

There are four main taxes that are typically relevant when you sell a business: capital gains tax, corporation tax, VAT and income tax. Which of them apply depends on the structure.

Tax on a share sale

With a share sale, the seller would typically expect to pay capital gains tax on the gain made on the sale of the shares. Typically there is no VAT, no corporation tax and no income tax payable on a share sale. One tax, paid once, by you, on the difference between what the shares are worth on sale and what they cost you.

Tax on an asset sale

Asset sales are more complex, because the company is the seller and the money lands in the company.

• Corporation tax. The limited company that disposed of the assets at a profit may have corporation tax to pay on that profit.
• VAT. HMRC may take the view that VAT is payable on some of the assets sold. This is typically avoided by arguing that the transaction was the transfer of a business as a going concern, in other words that the buyer is taking over a functioning business rather than buying a list of individual items.
• Income tax and capital gains tax on extraction. Because the company sold the assets and received the money, you then need to get the money out of the company and into your own hands. That extraction brings its own income tax and capital gains tax considerations, depending on how it comes out.

So on an asset sale you can face tax in the company and then tax again personally when you take the money out. The same sale proceeds can be taxed twice before they reach you. That double layer is the main reason sellers lean towards share sales.

A word of caution. I am a solicitor working in M&A, not a tax specialist, a tax lawyer or an accountant. The points here are the ones I see in practice on deal after deal, but you should take independent tax advice to make sure they apply to your situation and that you receive the correct advice for your own numbers.

How to pay less tax when selling your business

There are three things I would at least consider as a seller. None of them is exotic; they are the ordinary structuring points that make the difference between a good outcome and an unnecessarily expensive one.

• Structure the deal as a share sale. From the start, a share sale is typically the more tax-efficient route, because you are dealing with capital gains tax alone rather than corporation tax, possible VAT and then tax on extraction. It also gives you the cleaner break on liabilities, so the tax advantage and the legal advantage point the same way.
• Claim Business Asset Disposal Relief. You might still have capital gains tax to pay on a share sale, but you may be able to benefit from Business Asset Disposal Relief, formerly known as Entrepreneurs' Relief, which reduces the capital gains tax rate on qualifying gains down to a minimum of 14% at the time of recording. Whether you qualify, and how much of your gain the relief covers, is a question for your accountant, but it should be on the list from the outset because the conditions need to be met before the sale, not arranged afterwards.
• Leave the company's cash in the company and sell it with the shares. Speak to your accountant about leaving surplus cash in the company's bank account rather than extracting it before the sale. If you extract it, the company pays corporation tax on the profits and you pay dividend or income tax when it is distributed to you. The alternative is to agree in the share purchase agreement that any cash left in the company over and above what was expected is added to the purchase price. You then receive that money as consideration for the sale of the shares rather than as income.

That last point is worth dwelling on, because it is the one sellers most often miss. The difference is not in how much money you receive but in how it is characterised. Extract it before completion and it is income, taxed as income. Leave it in the company and price it into the share sale and it is part of the consideration for your shares, taxed as a capital gain alongside the rest of the price. The share purchase agreement needs to be drafted to make that work, usually through a cash-free, debt-free pricing mechanism under which the headline price is adjusted for the cash and debt in the company at completion. In my experience that is the most popular way of structuring a share sale, precisely because it deals with surplus cash cleanly.

Next steps

Decide early whether the sale will be a share sale or an asset sale, because that choice drives everything else on tax. Then speak to your accountant about Business Asset Disposal Relief and about leaving cash in the company, and have your corporate solicitor draft the share purchase agreement so that surplus cash is picked up in the purchase price rather than extracted as income.