When exiting a business, planning is key to maximising profits

  • 24th November 2021

When you sell or dispose of all, or part, of your business, you might be able to reduce your final income tax and capital gains liabilities through various reliefs.

We will have a look at these reliefs in a bit more detail:

Business Asset Disposal Relief

Business asset disposal relief (previously known as entrepreneurs’ relief) offers relief against qualifying gains, meaning you would pay tax at only 10% up to the maximum lifetime gains limit of £1 million for qualifying disposals on or after 11 March 2020.

Its availability is dependent on certain qualifying conditions being met throughout a qualifying period, usually two years to the date of disposal. There are lots of criteria to meet depending on the type of disposal so it’s always best to speak to your accountant to find out more on the details of this relief.

Spouses and civil partners are each entitled to their own lifetime limit of £1 million, potentially doubling the tax savings on offer. Assets can be transferred on a nil gain/nil loss basis between spouses or civil partners, so there is scope for planning here, but it is important to remember that both individuals must still meet the qualifying conditions. For example, in the case of shares, the individual must also be an employee or officer of the company (or of a company in the same trading group) for a 2 year period to the date of disposal.

Planning ahead is therefore essential to maximising relief.

Gift Hold-Over Relief

Business assets may be given to other members of the family. If this occurs then gift hold-over relief may be available, subject to agreement by both parties. This means that the tax on the gain is effectively deferred until the recipient sells the asset.

Overlap Relief

In the first few years of trading for an unincorporated business, some profits may have been taxed twice because of the way the basis period rules work in these opening years. In this case relief for these ‘overlap profits’ is available on cessation. The overlap profits are deducted when working out the profits for the final tax year. This deduction can create or increase a loss.

Terminal Loss Relief

This relief may be particularly relevant to anyone who ceases trading as a result of the covid-19 pandemic. A claim for terminal loss relief can be made if the business or individual permanently ceases to trade and makes a ‘terminal loss’. This is a loss made during the 12 month period to the date of cessation. Terminal losses can be carried back and set against profits of the previous three tax years or accounting periods.

There are lots of caveats with regards to the information above so we would always recommend that you discuss your exit strategy with us, sooner rather than later, so that we can help you to plan the best and most efficient way for you to exit your business.

Check out our handy guide on Exiting a business here.

All data and figures referred to in our news section are correct at the date of publishing and should not be relied upon as still current.