After many years spent building your business, the process of selling your business can be stressful, both personally and financially. However, in the UK, there is a tax relief that makes it very beneficial for you to sell your business, and “cash in your chips.” This used to be called Entrepreneurs’ Relief, but has recently been renamed Business Asset Disposal Relief (BADR) and Investors Relief (IR).
BADR recognises the efforts put into a business by entrepreneurs, while IR encourages private investors to invest in non-listed companies. Both reduce the capital gains tax on the profit you make when you’re selling or giving away part or all of your business.
What is Entrepreneurs’ Relief / Business Asset Disposal Relief?
BADR makes it possible for business owners to pay tax at a reduced rate of 10%, rather than the normal 20%, when they sell all or part of their business. The relief can also apply to company directors and employees that have 5% or more shareholding in the business.
Relief is available up to £1,000,000 on lifetime gains. This means that you could sell multiple businesses, and as long as the profit in total is less than £1m, you only pay tax at 10% on each of the profits on sale. As soon as the cumulative profit goes over the £1m level, you then pay tax at the normal rates, but only on the amount over the £1m. Add in your annual Capital Gains Tax (CGT) allowance (which for 2022/23 is £12,300 per individual), and if you spread the sales over a few years, you could save yourself quite a lot of money.
IR is similar, but is available to non-employed investors in a business who buy (post April 2016) and then hold their shares for 3 or more years. The added advantage for these investors is that their total profit limit is £10m. This can also be added to Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS). These schemes have even more tax advantages for those investing in small and start up businesses.
Who are the reliefs available to?
BADR is available to working business owners, partners or sole traders, as well as company directors, officers and employees with 5% shareholding or more. There must be a sale of at least 5% of the shares in the entity, but as mentioned above, this could be 5% each year. this allows full use of the the annual CGT allowance as well.
When defining a working officer, director or employee, HMRC doesn’t specify any requirements on the number of hours they work, or the salary of the individual. However, there does need to be some evidence that a person worked for the business in some capacity.
Any non-executive directors and company secretaries are counted as officers. A written employment contract is indicative of employment relating to an employee with 5% or more shareholding. Providing evidence of such a contract will help should HMRC make a challenge.
Plan for your exit well in advance
These rules do change regularly, so I would always recommend getting professional tax advice before making any decisions. Also I recommend that you plan for your business sale well in advance, as there will be things you can do which will help you massively when the time does come.
As for getting the business ready for sale, I always think that you should start a business with a view to selling it. On average, it should take you 5 – 10 years to build a business for sale, if you do what is necessary and treat it like a business and not a job.
You should have in mind the type of buyer, what the amount you want to sell it for, what level of profit and sales it would need to achieve be sold for this amount, and most importantly, what you will do once you have sold it.
Once you know where you are going, you just need to work out how to get there. What sales and marketing you will need, the financial and admin systems and reporting you will have to put in place, the operational systems and processes that will ensure the product or service is delivered profitably and the team that you will need to run the business without you. After all, once you have sold the business, the last thing you want is to have to stay working.
If you are would like more information on how to value your business, and get it ready for sale, then check out my webinar on ‘How to Sell Your Business’, HERE
For further questions on ‘Entrepreneurs/Investors or Business Asset Property Relief’ or ‘How to sell your business’, please drop me an email, email@example.com