Tax when selling a business in the UK: the four taxes and how deal structure changes them

When you sell your company, what taxes are you actually exposed to, and does the way the deal is put together change the answer? It does. Four taxes come into play on a business sale in the UK: capital gains tax, corporation tax, VAT and income tax. On a share sale you will usually only meet one of them. On an asset sale you can meet all four. This page explains the two structures, maps each tax against each structure, and sets out the three planning points I raise with every seller.

Asset sale vs share sale explained

Before you can talk about tax, you need to settle the structure with the buyer. There are two main routes, and they are different transactions in law, with different parties and different consequences.

Share sale

A share sale, which the buyer will call a share purchase, is where you sell your entire limited company by selling the shares that own it. You personally are the seller, because you are the one holding the shares, and the buyer acquires the whole company with everything in it. The way I usually describe it is a basket of fruit: in a share sale the buyer takes the basket and every piece of fruit inside.

Asset sale

In an asset sale, or asset purchase from the buyer's side, the seller is the company itself rather than you. The buyer picks certain assets out of the basket, the ones it wants, and leaves the basket and the remaining fruit behind. The company, still owned by you, keeps whatever was not sold. The buyer in an asset sale typically wants the parts of the business that make money, such as the contracts, the equipment, the goodwill and the trading name, and wants to leave behind anything it does not.

Why sellers usually prefer a share sale

From a liability perspective it is typically preferable for the seller to go with a share sale. It is a cleaner break: you hand over the whole company and are left simply with money. In an asset sale you keep the company, together with any assets that were not sold and any liabilities, known or unknown, that were not expressly transferred to the buyer. You then have to work out how to get the money out of the company and into your own hands, and what to do with a company that has stopped trading because its key assets are gone. Those two problems are where most of the extra tax on an asset sale comes from, because every step of getting money out of a company and closing it down is a step that can be taxed.

What taxes apply when you sell a business?

The four main taxes that are typically relevant on a business sale are capital gains tax, corporation tax, VAT and income tax. Here is how each one lines up against the two structures.

• Capital gains tax. On a share sale this is the tax the seller would typically expect to pay, on the gain made on the sale of the shares, in other words the increase in their value over what they cost you. On an asset sale it can also appear, but at a later stage, when you extract the sale proceeds from the company.
• Corporation tax. On a share sale there is typically no corporation tax. On an asset sale the limited company has disposed of assets, and if it did so at a profit, corporation tax may be payable by the company on that profit.
• VAT. On a share sale there is typically no VAT. On an asset sale HMRC may decide 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 rather than a sale of separate assets.
• Income tax. On a share sale there is typically no income tax. On an asset sale, the company received the money, so getting it to you personally brings income tax and capital gains tax considerations. The sale itself is only half the job; the extraction is the other half, and it is taxed separately.

Put simply, a share sale typically means capital gains tax and nothing else, paid by you once. An asset sale can mean corporation tax inside the company, possibly VAT, and then income tax or capital gains tax when you draw the money out. The headline price might be identical under both structures, but the amount that reaches your bank account can be very different. That is why the structure needs to be settled with tax in mind, and why a seller should not simply accept the structure the buyer proposes without understanding the cost of it.

I should say clearly that although I am a solicitor working in the M&A space, I am not a tax specialist, a tax lawyer or an accountant. Treat this as the framework I use to explain the issues to clients, and take independent tax advice on your own position before you commit to a structure, so that the advice you act on is correct for your numbers.

How to pay less tax when selling your business

With the four taxes mapped out, the planning points follow naturally. There are three that every seller should at least consider, and all three are decisions that need to be made before the deal is agreed rather than after.

• Choose a share sale where you can. Because it typically attracts capital gains tax alone, a share sale is usually the more tax-efficient structure from the start, before any relief or planning is applied. It also removes the problem of extracting money from the company and closing it down afterwards, since the company goes with the sale.
• Look at Business Asset Disposal Relief. Even on a share sale, capital gains tax may be payable, but you may be able to benefit from Business Asset Disposal Relief, which used to be called Entrepreneurs' Relief. It reduces the capital gains tax rate on qualifying gains, at the time of recording to a minimum of 14%. Your accountant can tell you whether you qualify and what needs to be in place before the sale for the relief to apply.
• Do not strip the cash out before the sale. Talk to your accountant about leaving the company's cash in its bank account rather than extracting it. If you take it out, the company pays corporation tax on its profits and you pay dividend or income tax when the profits are distributed. Instead, the share purchase agreement can provide that any cash left in the company beyond what was expected is added to the purchase price. You then receive that cash as consideration for the sale of your shares rather than as income, and it is taxed in the same way as the rest of the price for your shares.

The third point is the one most worth understanding. Nothing about the amount of money changes. What changes is the label on it, and the tax follows the label. Money extracted as profit is income; money that increases the share price is consideration for your shares. The mechanism that achieves this in the share purchase agreement is generally known as cash-free, debt-free pricing, under which the price for the shares moves depending on how much cash is actually sitting in the company's bank account at completion. It is the most popular structure I see on share sales, and it is the natural home for surplus cash that you have decided not to extract.

Next steps

Agree the structure with the buyer only after you understand what each of the four taxes means for you, and get independent tax advice early rather than at the point of signing. Then ask your corporate solicitor to build the cash position into the share purchase agreement so that surplus cash is paid to you as part of the price rather than drawn out as income beforehand.