Understanding Taxes When Selling Your Education Business

Selling your education business can be an exciting and rewarding experience, but it's essential to understand the tax implications involved. The following information will help you gain a better understanding of the taxes due when selling your business and the options available for reducing your tax liability. Please note that it's always recommended to seek professional tax advice when preparing for the sale of your business.

Should You Sell the Business Assets and Goodwill or the Company Shares?

One question that often arises for education business owners is whether they should sell the business assets and goodwill or the company shares. In most cases, selling the company shares is the more tax-efficient option.

When you sell the company shares, Capital Gains Tax (CGT) is applied to the total consideration of the deal. For higher rate taxpayers, the standard CGT rate is 28%. However, in most cases, owners of small and medium-sized enterprises (SMEs) can qualify for Business Asset Disposal Relief (BADR) - formerly known as Entrepreneur's Relief. BADR reduces the CGT payable to 10% on the first £1m of the sale proceeds.

Selling the business assets and goodwill means retaining the company, and the sale proceeds are treated as additional income for the company. This income is subject to Corporation Tax (currently at 19%) after deducting relevant expenses. To access the funds, you'll need to withdraw the cash from the company as personal income. If you close the company after the sale, you can still apply for BADR on the net proceeds within the company, but the overall tax paid on the consideration will be around 30% compared to 10% if you sold the company shares.

Buyer's Perspective on Acquiring Business Assets and Goodwill vs. Company Shares

Some buyers may prefer to purchase the business assets and goodwill to avoid potential risks associated with unknown liabilities of the company. However, there's usually little or no tax advantage for the buyer in acquiring the business assets and goodwill over the company shares. The risk of taking on unknown liabilities can be addressed within the warranties and indemnities section of the Sale and Purchase Agreement. As a result, most buyers are willing to acquire the company shares.

Seeking Professional Tax Advice

It's crucial to consult with a professional tax advisor when preparing to sell your education business. Some considerations may include extracting a property from your company or managing the sale proceeds for Inheritance Tax purposes. Working with a knowledgeable tax advisor can ensure that you're making the best decisions for your specific situation.

In conclusion, understanding the tax implications of selling your education business is essential for making informed decisions and maximising your profits. Selling the company shares is typically the more tax-efficient option, but it's always wise to consult with a professional tax advisor to navigate the complexities of your particular situation.

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Last updated: April 2023