Q&A: Tax implications when selling a business
Article Date: Sep 07 2005
Tax: don't pay more than you have to
Q: I own 25% of a company that I have worked for for the last 6 years. The company was initially a sole trader (run by somebody else) but 4 years ago it became a LTD company. The original sole trader still owns the other 75% of the company. If we were to sell the company now, say for instance for £4m, I would obviously be entitled to 25% of that = £1m. What are my tax implications on this amount?
Answered by Phil Verity, Mazars
There are too many assumptions to make to give a definitive answer to this question and more information is needed on circumstances of the original investment.
However, I assume this is an unquoted limited company and that the sale is to an unconnected third party. If you invested in 25% of the shares four years ago and the company qualifies as a business asset (there are special rules for qualification and a review of the company activities is necessary) you may be able to claim business asset taper relief. At current tax rates this may mean that you are entitled to reduce your capital gain by up to 75%. The final tax bill will depend on the amount of your initial investment, your other income in the tax year in which you make the gain, any other capital gains that you have made and any losses brought forward from previous years. You should also be aware of your annual exemption for capital gains (£8,500 in 2005/06) and of the potential availability of tax relief for the acquisition of another business asset.
For a gain of this size you should consult a tax adviser with all of the details as making the wrong assumptions might prove very costly, we will happily sign-post you to a highly reputable firm specialising in such matters.
Phil Verity is a partner at Mazars, the international accounting and business advisory firm, and head of the mid corporate market business line. Phil works with a wide variety of entrepreneurial and owner-managed businesses, helping them tackle the challenges of growth and development. He frequently advises companies on issues such as business strategy, financial management and control, mergers and acquisitions, succession and overseas expansion.
