Planning for the sale of a private business

It can be exciting to realise that years of hard work will be rewarded on a business sale. But that sale could incur a substantial capital gains tax (CGT) liability and a substantially increased exposure to inheritance tax.

Advance planning can reduce the impact of these taxes. This article looks at some of the planning opportunities for the sale of shares in a private limited company. Similar considerations apply to the sale of unincorporated businesses, such as partnerships or sole traderships.

CGT

The sale of shares gives rise to CGT which, for higher rate taxpayers, is 24% of gains less any allowable losses and the £3,000 annual exempt amount. CGT may be deferred by the issue of loan stock in the purchasing company, but this is a relatively unusual option.

BADR

Business asset disposal relief (BADR) will normally be available for trading companies meaning that the first £1 million of capital gains (over the shareholder’s lifetime) will be taxed, currently, 18%. To qualify for BADR, the vendor must be a full-time employee or director of the company who has held a shareholding of 5% or more for at least 2 years.

BADR can give CGT savings of up to £60,000. If other assets are disposed of in the same tax year as the shares, the £3,000 annual exempt amount should be set against gains on those other assets.

If an individual is married and has at least a 10% shareholding in the company, a transfer of a 5% or more shareholding to an employed spouse can allow them to qualify for BADR in their own right if the company sale takes place at least 2 years later. No CGT or inheritance tax arises on transfers between spouses.

Where children are working in the business, a gift of a 5% or more shareholding may enable them to qualify for BADR on the subsequent sale. S165 holdover relief can be claimed to defer CGT on such disposals until the sale. Such transfers are also potentially exempt transfers (PETs) for inheritance tax purposes and can help move future growth outside of the business owner’s estate. If the donor dies within 7 years, business relief may still be available, provided the shares continue to qualify at the date of death, including where the recipient still holds the shares or qualifying replacement business property.

If the business owner wishes to keep control over the gifted shares (and subsequent cash proceeds), a trust could be used. To qualify for BADR on a later sale by the trustees, it would generally need to be an interest in possession trust in favour of the adult child(ren), who would also need to have been a full-time employee(s) or director(s) of the company over the previous 2 years. For the trustees to qualify for BADR, the beneficiary must also have a personal shareholding of at least 5% in the company. However, the extent to which the business owner can retain control over the subsequent sale proceeds will depend on the trust structure and wording.

Pension contributions

Up to £60,000 per employee can be paid into a pension scheme each tax year, or more if carry forward relief is available. Whilst employer contributions are not restricted to the employee’s relevant UK earnings, contributions must be made for the benefit of the trade to be tax deductible.

Employer pension contributions extract money from the company in a highly tax- efficient way whilst reducing the value of the business for CGT purposes. Such planning should not be too aggressive. For example, HMRC may look very carefully at a £200,000 employer contribution shortly before the sale.

Inheritance tax

A business sale may have the effect of moving a business owner from no inheritance tax (where 100% business relief is available) to full exposure to inheritance tax on the cash proceeds. Where a sale is contemplated some years in the future and lifetime transfers are acceptable to the business owner, it can, subject to personal circumstances, make sense to transfer shares now and get capital growth out of the estate.

Outright transfers (PETs) are not subject to inheritance tax when made but, if the donor dies within 7 years of the gift, they become chargeable and will then be tested to see if business relief applies. This will be the case if the gifted shares are still held or have been sold with proceeds then being reinvested within 3 years into other qualifying business property (such as shares of up to £2.5 million in a business relief scheme). Where the donor wants to retain full voting control over all shares, a trust could be used. Shares transferred to a trust would be a chargeable lifetime transfer which should not exceed the sum of the settlor’s available 100% business relief allowance and nil rate band.

Before gifting shares, it is important that the business owner considers three important aspects:

• Capital gains tax applies unless a claim is made for s165 holdover relief to defer any CGT until disposal of the shares. However, this also means that the uprating of the shares on the donor’s death, had he or she retained the shares, is lost;
• The shareholder should formalise entitlement to future employment benefits, such as salary, bonuses and pension benefits, by setting up a service agreement. Otherwise, a reservation of benefit may arise if substantial benefits are taken after the gift of shares; and
• The business owner loses the right to any dividends on gifted shares.

Advance planning can considerably ease the tax burden arising on a business sale – but planning in advance is essential.

If you, or someone you know, would like guidance on planning for a business sale or other financial planning for business owners, contact us to arrange a free initial consultation.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. The information in the article is based on current laws and regulations which are subject to change as at future legislations.

The information in this article is correct as at 26/05/2026.

The Financial Conduct Authority does not regulate tax advice, trusts or estate planning. 

Tax treatment depends on individual circumstances. Reliefs such as BADR are subject to change; eligibility criteria and are not guaranteed to remain in place.