Tax considerations when buying or selling a company

The sale or part sale of a company is a taxable event; therefore, when considering a proposed sale, it is essential to seek the advice of a tax specialist before agreeing to terms. The legal structure of a transaction plays a critical role in how those tax consequences arise.

A common mistake when selling a company

The following example illustrates how a deal structure can create unexpected tax consequences:

James, who has spent 30 years building a profitable engineering business, receives an offer that seems to secure his retirement. Keen to keep the deal moving, he accepts the buyer’s £1 million request for an asset sale, unaware of the tax consequences.

After completion, he learns that the company has made a substantial chargeable gain on the sale, pushing its taxable profits into the highest tax bracket. When James then extracts the sale proceeds from the company through dividends, he incurs a second layer of tax at personal rates, drastically reducing what he takes home.

Worse still, because the shares were never sold, he cannot claim Business Asset Disposal Relief (BADR), missing out on the chance to pay Capital Gains Tax at 14% rather than 24%. Had he received tax advice at the outset, James could have structured the transaction as a share sale, eliminating the company-level tax charge and potentially qualifying for Business Asset Disposal Relief personally.

Instead, the deal structure locked him into an avoidable double-tax scenario. What he expected to fund a comfortable retirement becomes a stark lesson in how failing to take early tax advice can erode the value built over a lifetime.

In this article, we will outline how seeking specialist tax advice can help you avoid James’ mistakes.

Corporation Tax

Corporation Tax is the tax a company pays on its profits, including profits arising from the gains of a sale of its business assets. As the tax treatment differs significantly between an asset sale and a share sale, it is critical for business owners to understand how each structure affects the Corporation Tax position before entering into negotiations.

Corporation Tax in a business or asset sale

When a business is sold by way of an asset sale, the company itself is treated as disposing of its assets (such as goodwill, property, or equipment), and any gain realised forms part of its taxable profits for that year. The company will therefore pay Corporation Tax at the applicable rates, currently ranging from 19% to 25% depending on the level of profits. These tax liabilities arise at the company level and do not fall directly on the shareholders.

Share sales and the Substantial Shareholding Exemption (SSE)

A share sale is different to an asset sale. Here, it is the shareholders, not the company, who dispose of the shares. As a result, the company does not pay Corporation Tax on the sale, and the tax consequences fall on the individual shareholders, typically under Capital Gains Tax rules.

However, when a company disposes of shares in a subsidiary, the Substantial Shareholding Exemption (SSE) may apply. SSE can eliminate the Corporation Tax charge on the gain if certain conditions are met, including that the company held at least 10% of the subsidiary for a continuous 12-month period within the last six years and that both companies are trading or part of trading groups.

Capital Gains Tax (CGT)

Similar to Corporation Tax, where an individual sells assets or shares, the profit they make on that disposal is instead subject to Capital Gains Tax.

Capital Gains Tax has been targeted by recent government budgets, with the rate increasing from 10% to 18% for base-rate taxpayers following the 2024 Autumn Budget. For higher- or additional-rate taxpayers, this rose from 20% to 24%.

The Capital Gains Tax annual exemption amount, which reduces your Capital Gains Tax liability, has similarly been subject to cuts in recent years. In the 2022/23 tax year, the CGT annual allowance was £12,300; it is now just £3,000. The tax-free portion of any gains has therefore been cut by more than 75%.

Specialist tax advice can help reduce your CGT bill by making best use of your annual exemption each year, timing disposals across different tax years, and using any available capital losses to offset gains.

Business Asset Disposal Relief (BADR)

Business Asset Disposal Relief, preceded by Entrepreneur’s Relief, is a Capital Gains Tax relief intended to incentivise individuals to grow and invest in their businesses.

Simply put, Business Asset Disposal Relief reduces the Capital Gains Tax payable to 14% on qualifying gains, provided the disposal meets the relevant conditions. The rate is scheduled to increase to 18% for disposals made from 6 April 2026. The relief is subject to a lifetime limit, meaning each individual may claim Business Asset Disposal Relief on up to £1 million of qualifying gains over the course of their life. Once that threshold is reached, any further gains are taxed at the standard Capital Gains Tax rates.

Qualifiable disposals include:

• The sale or part-sale of a sole trade, partnership or company.
• Assets used in a business that has ceased, provided they are sold within three years of cessation.
• Shares in a personal company.

Corporate bodies, such as limited companies, cannot claim Business Asset Disposal Relief. The relief is strictly available to individuals, including sole traders, partners, and individual shareholders who meet the qualifying conditions.

In addition, because the relief is specifically aimed at disposals of business assets, it does not apply where the asset being sold is held purely for investment purposes. This means that disposals of assets such as investment properties, portfolios of shares, or businesses whose activities are predominantly investment-led will not qualify for the reduced Business Asset Disposal Relief rate. Only assets used in, or forming part of, a genuine trading business fall within the scope of the relief.

One challenge with Business Asset Disposal Relief is that its rules were created when the relief available was far more generous, meaning the legislation has remained disproportionately complex relative to the relatively modest level of tax relief now offered. As a result, navigating the qualifying conditions can be difficult, particularly where ownership structures, group arrangements, or personal shareholdings are involved. It is therefore crucial to seek specialist tax advice at an early stage to ensure you are well-positioned to secure the relief, where available.

Earnouts

Earnouts are deferred payments in a sale which are typically contingent on future performance. It is essential to know how these future payments will be treated for tax purposes.

If the value of the earnout is ascertainable at the time of sale (for example, a fixed payment), Capital Gains Tax can be charged at the time of the sale.

However, if the value of the earnout is unascertainable at the time of sale (for example, contingent on future performance), the earnout may be treated as a post-sale adjustment. In this case, the future Capital Gains Tax liability only crystallises at the value when the earnout payment is received. This can defer Capital Gains Tax payments, but the overall sale price (and resulting Capital Gains Tax) is not guaranteed.

If the earnout payment is in shares, the Capital Gains Tax liability is rolled over into the new shares and becomes payable only upon the sale of those shares.

If the earnout payment is linked to ongoing employment or personal performance targets, it may be treated as employment income, which is subject to higher income tax and National Insurance Contributions.

Deferral and reinvestment strategies

Capital Gains Tax liabilities can be further deferred or reduced via reinvestment of the sale proceeds into government-approved schemes.

Rollover Relief allows for the deferral of your Capital Gains Tax liability arising from the disposal of your business asset by reinvesting the proceeds into another qualifying business asset, provided the investment is made within one year before or three years after the sale. The original Capital Gains Tax liability becomes payable upon the sale of your stake in the new qualifying business asset.

Enterprise Investment Schemes (EIS) involve investing the sale proceeds into an EIS-qualifying company. This defers the Capital Gains Tax liability until the shares in the EIS-qualifying company are sold or until the scheme rules are breached.

The Seed Enterprise Investment Scheme (SEIS) is designed to help smaller or newer businesses secure the funding to support their growth. While reinvestment in an SEIS-qualifying company exposes your investment to greater risk, it provides Capital Gains Tax relief on the original disposal of up to 50%.

Contact our corporate solicitors for support

Our corporate solicitors advise on the legal aspects of business sales and acquisitions and work closely with trusted independent tax advisers, enabling us to introduce clients to the right specialist where tax advice is required.

Stewart Dickens, corporate solicitor, comments:

“Getting tax advice from the outset informs how best to structure your business sale or purchase, whilst simultaneously navigating how the complex provisions and reliefs interact, to determine the optimum timing and post-sale tax planning to minimise your tax liability.”

Whether you are selling your first business or an experienced exiting entrepreneur, our team ensures that every detail is carefully reviewed before you commit. Get in touch to speak with our corporate solicitors and discuss how we can support your transaction.