BUSINESS // Beyond the Sale Price: tax on business exits
A business sale is often reduced to numbers: the headline figure, the exit multiple, the deal closed. Yet beneath the surface of every transaction lies a quieter calculus: how much of that value will endure, and in whose hands? In the UK alone, shifting capital gains rules, the shrinking annual allowance, and the uncertain trajectory of reliefs such as Business Asset Disposal Relief (BADR) are rewriting the playbook for entrepreneurs planning their exit. At a moment when more founders than ever are preparing to sell we have created this guide to steer you through the administrative and accounting requirements ahead of an exit.
Tax: What is applied?
A common misconception among founders is that tax applies to the entire sale price. In truth, it is the profit (the sale proceeds minus the original purchase price, improvements, and allowable costs such as legal and professional fees) that forms the taxable gain. A company sold for £5 million might deliver only £2.8 million of taxable gain once the original £2 million investment and £200,000 in fees are deducted. That difference, easily overlooked, is what determines the scale of your liability. Meticulous record-keeping, far from being an administrative footnote, can become a tool of wealth preservation. Each invoice preserved, each reinvestment documented, can translate into tens of thousands of pounds saved in tax.
Profit vs Sale Price: Understanding the Taxable Gain
The most common misconception is that tax applies to the entire sale price. In reality, what matters is the gain (the difference between what you receive and what you’ve invested (plus allowable costs)).
Formula:
Sale Price – (Purchase Price + Professional Fees + Improvements) = Taxable Gain
Example: You sell your company for £5 million. You invested £2 million over the years, and professional/legal fees add up to £200,000. Your taxable gain is not £5 million — it’s £2.8 million.
Why it matters: Transaction costs, reinvestments, and even improvements can all reduce the tax bill, but only if you have the documentation.
Sale Structuring
The structure of the sale is equally decisive. An asset sale (in which individual assets of the business are sold) often exposes the seller to multiple layers of taxation, with some items, such as inventory or depreciated equipment, taxed at ordinary income rates rather than the more favourable capital gains rate. A share sale, by contrast, typically allows the transfer of the entire company and is usually more efficient, subjecting the proceeds to capital gains tax alone. This structural choice, often agreed upon early in negotiations, can shape the financial outcome more profoundly than the headline valuation itself.
Structure: Asset Sale vs Share Sale
Asset Sale: Buyers cherry-pick assets. Sellers face tax on each item sold, and some proceeds may be taxed as ordinary income (e.g., inventory, depreciation recapture).
Share Sale: Sellers transfer ownership shares. Typically simpler, often more tax-efficient, with capital gains treatment applying to the whole.
Tax Reliefs
Reliefs play a central role in softening the tax impact, yet they are frequently misunderstood or under-utilised. Business Asset Disposal Relief (BADR) offers a reduced 10 percent capital gains rate on up to £1 million of lifetime gains. But BADR is no longer as generous as it once was, and under current proposals, the rate is set to rise to 14 percent in 2025 and 18 percent in 2026. Other reliefs offer more specialised routes: Holdover Relief allows gains to be deferred when gifting assets, effectively passing the liability to the recipient; Rollover Relief permits reinvestment into new business assets with tax deferred until those assets are eventually sold; Incorporation Relief can delay capital gains tax when converting a sole trade into a limited company; and Investors’ Relief provides a 10 percent rate on up to £10 million of gains for shares in unlisted trading companies held for three years. Each of these requires careful eligibility checks and strategic foresight, but combined, they can transform the economics of a sale.
Reliefs That Change the Landscape
Business Asset Disposal Relief (BADR): 10% CGT rate on up to £1m of lifetime gains. Currently under political pressure, with rates set to rise.
Holdover Relief: Allows you to gift shares or business assets without immediate CGT; the recipient inherits the gain.
Incorporation Relief: Transfer a sole trader business into a company in exchange for shares; CGT deferred until those shares are sold.
Rollover Relief: Reinvest proceeds into qualifying business assets; CGT deferred until the new asset is sold.
Investors’ Relief: Offers a 10% rate on up to £10m of lifetime gains for shares in unlisted trading companies held 3+ years.
Employee Ownership Trusts (EOTS)
In recent years, Employee Ownership Trusts (EOTs) have emerged as one of the most compelling exit strategies for values-driven founders. Selling to an EOT allows owners to transfer their company into employee ownership, often avoiding capital gains tax entirely while creating long-term cultural continuity. High-profile examples such as Richer Sounds and Riverford Organics illustrate how an EOT can both preserve a business’s ethos and empower employees as stakeholders. Yet reforms have tightened the rules, requiring genuine independence from the seller and fair valuation for at least four years post-sale. An EOT is not a shortcut, but when properly structured, it represents a union of financial efficiency and legacy stewardship.
The Rise of (EOTs)
EOTs allow owners to sell to employees, often avoiding CGT altogether, while embedding company culture in the next generation. Famous UK examples include Richer Sounds and Riverford Organics.
Pros: No CGT, strong legacy, motivated workforce.
Cons: Recent reforms restrict seller control and require fair pricing for four years.
Capital Gains Tax
Timing, too, has become a critical lever. The capital gains tax allowance has been dramatically reduced, from £12,300 in 2022 to just £3,000 in 2024–25, and BADR’s preferential rate is scheduled to rise. The window for locking in today’s lower rates is closing. Pension contributions, often overlooked, can be strategically deployed before a sale to reduce both taxable profits and company valuation, further easing the burden. Delay, in this context, is not neutral as it can be financially punitive.
Timing Is Power
Shrinking Allowance: The UK CGT allowance has fallen from £12,300 in 2022 to just £3,000 by 2024–25.
BADR Rates Rising: From 10% to 14% in 2025, and 18% in 2026. Waiting could cost dearly.
Pension Contributions: Strategic contributions pre-sale can reduce valuation and liability.
Case studies reveal the stakes.
EcoGoods Ltd, a sustainable consumer brand, faced a prospective sale in 2025. By structuring the deal as a share sale, the founders ensured capital gains treatment. By claiming BADR, they locked in the 10 percent rate before the scheduled rise. And by transitioning into an EOT, they safeguarded the company’s mission, embedding ownership among employees who had helped build it. Their decision was not only tax-efficient but also values-conscious, preserving both financial capital and cultural capital for the long term.
Exit Planning Checklist
Before You Sell
☐ Decide whether you are pursuing an asset sale or a share sale and understand the tax impact of each.
☐ Calculate your taxable gain, not just the headline sale figure.
☐ Gather and preserve documentation: acquisition costs, professional fees, and reinvestments.
☐ Explore all available reliefs (BADR, Holdover, Rollover, Investors’ Relief, EOTs).
☐ Model different sale timings — consider the impact of rising CGT rates and shrinking allowances.
☐ Review pension contributions or other structures that can reduce liability.
☐ Align the exit with your broader goals: family security, philanthropy, new ventures.
☐ Engage a team of advisors (legal, tax, wealth planning) early in the process.
Jargon Buster
Capital Gains Tax (CGT): Tax paid on the profit (gain) when you sell an asset that has increased in value.
Taxable Gain: The profit after deducting allowable costs (purchase price, professional fees, improvements).
Business Asset Disposal Relief (BADR): Relief that reduces CGT on qualifying business disposals to 10% on gains up to £1m.
Employee Ownership Trust (EOT): A structure that allows a company to be owned by employees, often enabling sellers to avoid CGT.
Depreciation Recapture: Taxing back prior depreciation benefits when selling business assets (e.g., equipment).
Rollover Relief: Deferral of CGT if sale proceeds are reinvested in another qualifying business asset.
Holdover Relief: Defers CGT when gifting business assets, transferring the gain to the recipient.
Share Sale vs Asset Sale: Selling ownership shares (share sale) vs selling individual assets (asset sale); each has distinct tax consequences.
Ordinary Income vs Capital Gains: Income taxed at standard income tax rates vs typically lower CGT rates.
