Selling your business in a tax efficient manner

Owners of family run businesses who are looking to perhaps retire or do something different should consider different options for the most tax efficient route.

Entrepreneurs Relief (ER)

For business owners who are directors and shareholders this route is perhaps most known and should be considered when winding down the business. In utilising ER the owner(s) can, subject to meeting qualifying conditions, windup the business and effectively pay tax at capital rates of 10% as opposed to drawing all profits in dividends and thereby potentially exposing themselves to higher rates of income tax. For the relief to apply to all shareholders they should also be directors or employees within the business.

The other option – selling up

With proactive planning there could be a different option for owners provided they are selling the business, perhaps to a competitor. By amending the structure greater tax advantages can be achieved. If a holding company is set-up above the existing business so a group relationship is formed (parent and subsidiary relationship), there is potential to utilise something called the substantial shareholding exemption (SSE) which exempts the sale of the business from any capital gains tax.

The holding company would absorb the gain and being cash rich can be used to fund retirement. Funds can be extracted gradually to utilise the tax free dividend allowance or up to the basic rate tax band (paying tax at 7.5%).

The options thus differ depending on selling or winding up.

AJN Accountants are specialists in helping contractors, freelancers and small businesses to save tax and time.

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