What tax will I pay on the sale?
You will pay Capital Gains Tax on the gain from the sale of your company. Most shareholders are eligible for Entrepreneurs’ Relief which reduces the tax rate to 10%. Take early advice to make sure all shareholders will qualify for this important relief.
Entrepreneurs Relief is intended to reward business owner/managers with a low rate of tax when they sell their company. It is a very generous tax break, reducing the rate of tax from 28% to 10% and it is available on gains of up to £10 million (life-time limit).
Most shareholders in private companies qualify for Entrepreneurs Relief, but many who could qualify will not qualify and consequently will pay much more tax that they need to. Fortunately, it is usually possible to take action to ensure that this relief is obtained for all shareholders.
The conditions required for Entrepreneurs’ Relief to apply are complex and you should always seek tax advice relating to your personal circumstances. However if you can answer yes to the following 3 questions then it is likely your gain will qualify:
- Do you own at least 5% of the ordinary share capital of the company?
- Are you a director, company secretary or employee of the company?
- Will you meet both of the above conditions for the whole of the year up to the date of the sale?
Entrepreneurs’ Relief (continued)
A seemingly unintended consequence of these conditions is that a shareholder that has retired and ceased to be a director before selling their company, will not qualify for Entrepreneurs’ Relief. To preserve this tax break, ensure all shareholders are officers or employees of the company for at least 12 months preceding the date of the sale.
It is also common for spouses of business owners to have shares, but no active role in the company. Ensure that the spouse is a director (non-executive director is fine) or company secretary so that they qualify for Entrepreneurs’ Relief (assuming also that the shareholding is at least 5%).
Note the above conditions relate to the sale of a trading company – sales of unincorporated businesses and related assets used by a business can also qualify for Entrepreneurs’ Relief. Shares held in a trust sometimes qualify for Entrepreneurs’ Relief and sometimes do not – advice should always be taken.
Always take professional advice at least one year before an intended sale, so that your individual circumstances can be taken into account and actions taken when necessary.
If a sale is about to complete and one or more of the shareholders does not qualify for Entrepreneurs’ Relief then it may still be possible in certain circumstances to obtain the relief on the entire share sale.
You should not rely on the brief guidance on this webpage. Always take professional advice in respect of Entrepreneurs’ Relief.