Paying corporation tax when selling or closing a business
Making the decision to wind down or sell a business can be a stressful time and it’s easy to overlook all the implications, especially when it comes to UK Corporation Tax and Capital Gains Tax.
If your limited company stops trading and conducting business activities or is forced to close down, you may still have to make a company tax return and pay Corporation Tax during the winding down process.
This will depend on the nature of the company and the amount of profits available to be shared between shareholders and directors as well as how the company is dissolved. In this article, we explain everything you need to know.
Do I need to pay Corporation Tax when selling or closing a business?
If you’re in a business partnership or you’re a sole trader, you’ll pay Capital Gains Tax when selling part or all of your business assets. A limited company selling a business must do the same but will be under the UK Corporation Tax system as opposed to through Capital Gains Tax.
That said, how much tax you’ll have to pay as a limited company will also depend on the way the company is to be closed down. As we’ll cover, you’ll have to keep in mind the tax rates of directors who may have to pay income tax on payouts. You should also consider tax relief such as Business Asset Disposal Relief (BADR) when dividing up profits to work out the best way to proceed.
Whether you are a limited company or sole trader you will still pay Capital Gains Tax if the company assets are worth more than they originally were. The sale of the business is just like any other sale of assets in as far as how you pay tax on profits made.
Curious about the small business tax rate? If so, check out our article “A Comprehensive Guide to Corporation Tax Rates for Small Businesses in the UK”.
What to take into consideration when selling or closing a business:
Before you can calculate how much tax you will be subject to and whether you will be liable to pay Capital Gains Tax or Corporation Tax when winding down or selling all assets, you will need to determine how the company is to be closed.
A UK limited company can either be dissolved via informal strike-off with Companies House or through members voluntary liquidation (MVL). Learn more about this on the HMRC site.
First, we’ll cover a voluntary strike-off. A limited company that does not have unresolved debts and has not traded or changed names within the last three months may make an application to be voluntarily struck off the Companies House register.
It’s important to remember that the term ‘”trading”, for Corporation Tax purposes, does not mean simply operating and HMRC understands that there are still business activities to be conducted during this time period. You will still be able to apply for a voluntary strike-off despite conducting the necessary activities to wrap up the business’s affairs such as asset sale, settling debts or complying with statutory requirements.
If your business does not meet the requirements for strike-off then you will have to proceed via Members Voluntary Liquidation (MVL).
MVL is the process used to wind down solvent companies. The assets of the limited company are converted to cash and then distributed among shareholders. This process must be conducted by a licenced insolvency practitioner.
When going down the MVL route, it’s important to keep in mind that the distribution can be subject to income tax if the company has five or fewer shareholders. This is also true if the owner is involved in a similar business and has already received a distribution from another insolvency within the last two years.
Thinking about selling a business in the UK? Check out our article “Paying corporation tax when selling a business asset”.
How much corporation tax do I have to pay when selling or closing a business?
You’ll still have Corporation Tax liabilities at your normal rate (based on your level of revenue) on any profits made during the process of ceasing trading or selling the business. You’ll pay tax on profits made from general trading income, investment income or chargeable gains made from selling assets to pay off creditors.
The rate of Capital Gains will be the regular 20% on any increase in the value of assets being sold. However, this can be reduced to 10% if you are able to utilise Business Asset Disposal Relief (formally known as Entrepreneur’s Relief).
Business Asset Disposal Relief (BADR) is one of the main ways to offset the tax bill when selling a business. Before March 2020, it was possible for this to be applied to the first £10 million of any individual’s gain. However, post 2020 only the first £1 million is eligible for the relief meaning the maximum possible benefit is £100,000 of tax saved.
Since Business Asset Disposal Relief is a tax relief calculated on a per-person basis, it may be possible to increase the total savings possible if, for instance, a close family member or spouse is made a part owner of the business.
Note: you will only be eligible to claim Business Asset Disposal Relief if you have owned the business for at least two years prior to the sale. To avoid encountering any pitfalls, get in touch with an accountant.
However if you’re wondering how to open a company in the UK as a non resident? Click that link to our article to learn more.
Tax planning after the sale
Both sole traders and directors often enlist the help of a financial advisor to calculate how much tax they can expect to pay. They can also help you to decide the best course of action to invest the proceeds of the sale.
There are alternative investment funds that allow you to defer some or all of your total Capital Gains Tax liability, additional ways to save like Business Asset Rollover Relief as well as tax relief schemes or funds that can boost the profit you get from inheritance tax if eligible. Speak to your accountant or a professional advisor to explore these options.
Potential tax implications
It’s important to bear in mind the personal tax rate of shareholders when dissolving a company and how the dividends interact with this.
If the company is informally struck off and has more than £25,000 total retained profits to be divided, then shareholders will pay tax at their normal marginal rate of tax on profits received.
As you can see, the tax implications of closing down a business or selling company assets can be a bit of a minefield. We recommend that most people should seek professional advice from an accountancy service like Sleek. With decades of experience with UK Corporation Tax, we’ve got accountants that can ensure compliance and efficiency.
If you’re unsure about any aspect of your taxes or need assistance with financial tax planning, consulting our tax advisors for corporate tax advice will save you time, money, and potential headaches. To provide you with an efficient and seamless tax process, Sleek has the right set of solutions for you!