How to tax-efficiently prepare your business for your retirement

Oct 6, 2021

If you’re a business owner planning to retire, it pays to start thinking early about the options for your business after you’ve stepped away.

There’s a range of options available to you, including selling your business, part-selling your business, competitor buy-out, business transfer, or winding up.

Read on to find out the key considerations in selling your business and how you can retire in the most tax-efficient way.

Selling your business

The structure of your sale will depend on what you want to achieve as a seller.

This can be complex and the best option for you will be determined by the size, structure and nature of your business. We recommend you seek expert advice.

As a starting point, have a think about the following.

Check your shareholders’ agreement

Your shareholders’ agreement and articles of association will set out the mechanics for selling your shares or assets. Find out what you need to do and plan accordingly.

If you choose to structure your sale as a share transfer (as opposed to an asset sale), you’ll need to review your shareholders’ agreement. Are the shareholdings recorded accurately? Make sure that any recent share transfers have been captured in your shareholders’ agreement and that the most recent iteration of the agreement is signed by all parties.

Structure your business for sale

You’ll want to make sure that your business is in the best shape to optimise your sale.

Think about the key people that will need to stay on, and identify any skills gaps that you may need to fill when you leave. Start training people to ensure the business runs smoothly in your absence.

Settle your outstanding debts where possible. Your business is more attractive to sellers if it’s in a robust financial position. Realise any investments to bolster your finances.

Great financial hygiene is key to a successful sale; so check that your financial reports are in order and that your stocks and inventories are up to date.

Tax considerations

The profits on a sale of a business will be taxed. You’ll incur capital gains tax (CGT) as a result of selling your business, whether it’s a share sale or an asset sale. CGT is taxed at 10% or 20%, depending on whether you pay the lower or higher rate of income tax.

If you’re in the higher band and subject to 20% CGT, you can halve this bill if you qualify for business asset disposal relief (BADR), formerly known as entrepreneurs’ relief.

Applying BADR allows a sale of up to £1 million of assets to be taxed at only 10% CGT. Everyone also automatically has an annual CGT tax free allowance. This year it is £12,300 of gains.

If your business has excess reserves, consider paying them into a pension to optimise your tax position. Depending on how the contribution is made you should see a significant benefit against corporation tax or personal income tax.

This means it is a tax-efficient way to ringfence money in your company for your retirement.

Winding up your business

You might want to close your business entirely when you retire. Winding up the business will allow you to transfer the assets and the money into your own name. You’ll still need to pay income tax, but if you pay yourself in dividends, you can keep this tax to 7.5% if you pay basic rate tax. The higher and additional rates are 32.5% and 38.1% respectively. These rates are set to rise in the 2022/23 tax year.

If you have employees, you’ll make them redundant when you wind up the business. That means you’ll incur redundancy costs. You’ll need to consider those costs when evaluating the final figures.

Ask us for help with your plan

Selling your business and preparing for retirement is a complex process and situation-specific. We recommend that you start planning early and appoint experts.

We have tried-and-tested methods for maximising your return. Please get in touch to find out more.