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Selling Your Business And Tax

Selling Your Business And Tax

Selling your business is a major milestone, Selling your business and tax is even bigger . Whether you’re retiring, moving on, or changing direction, it’s important to understand the tax implications. The way you structure your sale can have a big impact on how much tax you pay. You may get paid in full cash, through loan notes, or via future earn-outs. Each method has its own rules and tax consequences. This blog explores those options and shows how you can make tax work in your favour.

Start with Planning: Timing Matters

Good planning is key when selling your business. Ideally, you should start two years before your planned sale date. This gives you time to qualify for Business Asset Disposal Relief (BADR) and consider the best structure for your sale. It also helps you manage when and how tax is paid.

Failing to plan early could mean missing out on tax relief. At I Hate Numbers, we help you plan your business journey to make sure you take full advantage of the tax benefits available.

What Is Business Asset Disposal Relief (BADR)?

BADR can significantly reduce the tax you pay on selling a business. It allows you to pay just 10% Capital Gains Tax (CGT) on qualifying gains. This relief is available up to £1 million in lifetime gains. For higher or additional rate taxpayers, this is a major saving compared to the standard 24% CGT rate.

However, BADR is changing. The tax rate will rise to 14% from 2025/26, and 18% from 2026/27. Planning ahead helps you lock in the current lower rate.

To qualify for BADR, you must:

  • Own at least 5% of the ordinary shares
  • Hold those shares for at least two years
  • Work as an officer or employee of the company
  • Have voting rights and access to 5% of profits, assets on winding up, and sale proceeds

Make sure you claim BADR by the first anniversary of 31 January after the tax year of sale.

Option 1: A Straightforward Cash Sale

Selling for cash gives you certainty and simplicity. You know exactly what you will receive. If you qualify for BADR, you can benefit from the reduced CGT rate on your gain.

However, there’s a catch. HMRC treats the whole gain as arising in the tax year when the sale completes. That means you’ll need to pay CGT by 31 January following that tax year—even if some of the cash hasn’t yet been received.

But there is some flexibility. If you’re receiving the cash in instalments over at least 18 months, and the payments continue beyond the 31 January tax deadline, you can apply to HMRC to pay your CGT in instalments. This gives you more breathing room.

Option 2: Deferred Payments via Loan Notes

In some cases, you might not get paid fully in cash. The buyer might offer loan notes instead. Loan notes are promises to pay you a fixed amount in the future.

There are two types:

  • Qualifying Corporate Bonds (QCBs)
  • Non-qualifying securities

With qualifying loan notes, CGT is deferred until the notes are sold or redeemed. However, this deferral usually means you lose BADR. That’s because QCBs are not considered chargeable assets for CGT purposes.

But all is not lost. You can choose to be taxed immediately on the entire gain. This way, you may still claim BADR. You’ll need to make an election to HMRC. The catch? You’ll need enough funds to pay the CGT upfront—on both the cash and the value of the loan notes.

With non-qualifying notes, CGT is still deferred. The tax becomes due when the notes are redeemed or cease to qualify. But in this case, BADR cannot be claimed.

So, what’s the trade-off? Loan notes help spread your tax bill but may stop you from using BADR. This choice depends on your cash flow and long-term tax goals.

Option 3: Earn-Out Agreements

An earn-out allows you to receive part of the sale price later. The amount depends on your company’s future performance. This can be attractive if you believe the business will grow.

Here’s how it works:

  • At the time of sale, you estimate the future earn-out.
  • HMRC taxes you on that estimated value in the year of sale.
  • That amount is treated as a separate asset called a ‘chose in action’.

BADR may apply to the estimated value if the rest of the conditions are met. But here’s the key: when you actually receive the earn-out cash, it is treated as a new disposal. BADR won’t apply to this second amount.

What if you receive shares instead of cash for the earn-out? In that case, you can roll over the gain. The tax is deferred until you sell the shares. This can help with cash flow and allow further tax planning.

Earn-outs add flexibility and potential upside. But they bring uncertainty. You may end up paying tax on money you never receive if targets aren’t met. That’s why it’s vital to get good advice.

Double Your Relief: A Spousal Transfer Strategy

Married couples or civil partners can double their BADR allowance. By transferring shares to your spouse before selling, you may claim up to £2 million of relief. However, both partners must meet the BADR conditions.

This simple strategy can save thousands in tax. But timing and paperwork are crucial. Always seek advice to ensure the transfer meets all the rules.

Choosing the Right Route: What Should You Do?

Each payment method has pros and cons. Your choice depends on your goals, risk appetite, and cash needs. Ask yourself:

  • Do I want certainty and cash upfront?
  • Can I afford to defer some payments?
  • Will I benefit more from BADR or spreading the tax?

The answers will help shape your decision.

Here at I Hate Numbers, we work closely with business owners like you. We help plan sales, reduce tax, and ensure smooth transitions. Whether it’s a straight sale, deferred payment, or earn-out, we’ve got your back.

Don’t Leave Tax to Chance – Book a Tax Diagnostic Today

Selling your business and tax is one of the most important financial decisions you’ll ever make. Selling your business and tax , getting the tax position wrong can cost you dearly. That’s why we offer a comprehensive Tax Diagnostic.

With our diagnostic, you’ll:

  • Discover the most tax-efficient structure for your sale
  • Learn how to preserve or maximise BADR
  • Understand your payment options clearly
  • Create a strategy that fits your goals

Don’t wait until it’s too late. Plan early, reduce stress, and keep more of your hard-earned money. Book your Tax Diagnostic now.

Check out our resources and range of tax calculators,

Let’s make tax less taxing and help you sell smarter.

Plan it, Do it, and PROFIT!