Exiting your business with style
Whether you see yourself settling into retirement or moving onto your next big project once you’ve left your current business, planning is essential for a successful exit.
It sounds like it should be simple enough to hand over the business, step back and let a new owner take charge, but there’s a lot to consider when it comes to planning the process, determining the steps you’ll need to take and the timescale for the transition.
Ultimately, you also need to make sure you get what you want out of the transfer, both financially and in terms of your lifestyle goals.
As part of that, it’s important to think about the potential tax implications. After all, when you’re packed up and ready to move on to the next stage in your life, the last thing you want is a surprise tax bill.
Capital gains tax (CGT) is the main tax to think about when you’re planning a business sale. This is charged on the gain made when you sell or dispose of something for more than you paid for it, at a rate of 10% or 20% depending on your marginal rate of income tax – although that goes up to 20% or 28% for residential property.
The amount you might actually need to pay, however, is subject to various rules and reliefs, so working out the potential CGT liability on your business can be complicated.
For one thing, everyone has a tax-free CGT allowance of £12,300 in the 2021/22 tax year, or £6,150 for trusts.
Then there are the various business-specific reliefs you might be able to claim.
Business asset disposal relief, for example, gives you a 10% CGT rate on all gains for qualifying assets. This is unfortunately not as generous as entrepreneurs’ relief, which it replaced on 6 April 2020, but can still apply up to a lifetime limit of £1 million.
Your other option, which may be available under certain circumstances, is to put off paying your CGT liability.
Business asset rollover relief allows you to delay CGT when you use all or part of the proceeds from selling business assets to buy new assets. This is reasonably flexible – it can apply when you use the proceeds to improve assets you own, and you can also claim it provisionally when you’re planning to buy new assets.
And if you pass on your business as a gift or sell it for less than it’s worth, for instance to a family member, you may be able to defer CGT with gift holdover relief. This allows you to pass the CGT liability on to the person you give the asset to, so they’ll pay it when they eventually sell.
Another key consideration if you’re thinking of handing your business over to the next generation is inheritance tax.
A share in or ownership of a business, will be included in your estate for inheritance tax purposes, along with other assets such as your money, property, possessions and so on.
If the value of your estate is more than the tax-free threshold, which currently stands at £325,000, some of it may be liable for inheritance tax at 40%.
This applies to the things you pass on in your will, but it can also apply to assets you gift during your lifetime if they’re given within seven years of your death.
If you pass on a business asset that you owned for at least two years before your death, however, it should qualify for business relief.
You can get 100% business relief when you pass on a business or interest in a business or shares in an unlisted company.
A lower 50% rate of relief applies on shares controlling more than 50% of the voting rights in a listed company, as well as land, buildings or machinery you either owned used in your business, or that were held in a trust for the business.