Business Information, Business StrategyMerranti

Five Tax Planning Steps to Take Before Selling Your Company

Selling a business is often the most significant financial event in a business owner’s life — and one that can trigger substantial tax liabilities if not planned carefully. Whether you’re retiring, exiting a business you’ve built, or selling to management or external buyers, the decisions you make in the years before the sale will heavily influence how much tax you pay and how much value you retain.

In this guide, we outline five essential tax planning steps every company owner should take before selling — ideally at least 12 to 24 months in advance.

1. Review Your Eligibility for Business Asset Disposal Relief (BADR)

Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) allows qualifying shareholders to pay Capital Gains Tax (CGT) at just 10% on the first £1 million of lifetime gains.

To qualify in 2025/26, you must meet the following conditions for at least two years up to the date of sale:

  • Own at least 5% of the ordinary share capital and voting rights
  • Be entitled to 5% of profits and assets on winding up
  • Be an employee or office holder (e.g. director) of the company
  • The company must be a trading company or the holding company of a trading group

Important: BADR is not automatic — and HMRC will deny relief if these conditions are not strictly met. Complex share structures (such as alphabet shares or growth shares) may fail the 5% entitlement test if not carefully structured.

Planning Action:

  • Review your shareholding now — don’t assume you qualify
  • Document your role as a director or employee
  • Consider share reorganisation (if needed) more than 2 years before sale

Even with the £1 million lifetime cap, BADR still represents a potential £100,000 tax saving.

2. Understand the Impact of Share Structure and Recent Share Issues

Your share structure — and how long you’ve held the shares — is critical.

Problems arise when:

  • Shares have been issued within two years of sale
  • There are multiple classes of shares with unclear rights
  • Shares were acquired through options, EMI schemes, or via restructuring

HMRC’s interpretation of the 5% test includes economic rights, not just voting rights. If your articles or shareholder agreements are ambiguous, it could cost you BADR.

Also, issuing shares to new investors (e.g. private equity, employees) could dilute your holding below the 5% threshold unless carefully structured.

Planning Action:

  • Clarify share classes and rights in company documents
  • Avoid issuing or restructuring shares close to a planned sale
  • Consider alphabet shares to preserve flexibility while retaining 5% rights

3. Prepare for a Due Diligence Process and Clean Up the Balance Sheet

Buyers will carry out financial and tax due diligence on your company — and anything they find can affect valuation or delay the deal.

Red flags for buyers often include:

  • Director’s loan accounts that are overdrawn
  • Poor record-keeping or unsubmitted tax returns
  • VAT or PAYE irregularities
  • Non-business assets (e.g. cars, investments) on the balance sheet
  • Redundant subsidiaries or dormant companies

You should also review any non-trading activities. If your company holds investment assets (e.g. buy-to-let property or listed shares), it may disqualify the company from being a trading company for BADR purposes.

Planning Action:

  • Repay overdrawn directors’ loans well in advance
  • Remove non-trading or personal assets
  • Ensure company tax filings are up to date
  • Dispose of redundant assets or clean up group structure

These actions not only protect your eligibility for tax reliefs — they also make your company more attractive to buyers.

4. Consider Timing and Spouse Transfers to Maximise Tax Efficiency

Timing is critical when planning a company sale. You can often improve your tax position by:

  • Delaying the sale to complete a full two-year qualifying period for BADR
  • Transferring shares to a spouse or civil partner (tax-free) if they meet the qualifying conditions
  • Splitting ownership to use both partners’ CGT annual exemptions and BADR allowances

This can reduce the effective CGT rate across the household and increase the amount of gains eligible for the 10% rate.

However, the spouse must also:

  • Own the shares for two full years before the disposal
  • Be an officer or employee of the company
  • Meet the same 5% ownership and entitlement rules

Planning Action:

  • Start the two-year holding period early
  • Make any spouse share transfers well in advance (not just before sale)
  • Ensure the spouse has an active role in the company if possible

If you act too late, you may lose the opportunity entirely.

5. Plan for Life After Sale: Cash Extraction and Inheritance Tax

Even after a sale, there are tax considerations in how you extract and hold the proceeds.

Key considerations:

  • Holding company proceeds: If you sell shares back to the company (a share buyback), CGT treatment is only available if conditions are met — otherwise, the proceeds may be taxed as a dividend.
  • Trusts and gifting: You may wish to gift shares before the sale using Holdover Relief under s.165 TCGA to pass on gains tax-efficiently.
  • Inheritance Tax (IHT): Shares in a trading company often qualify for 100% Business Relief, but the sale proceeds (cash) will not. Once shares are sold, your estate could become more exposed to IHT.

Planning Action:

  • Consider gifting or trust planning before the sale — not after
  • Think about holding proceeds in tax-efficient wrappers (e.g. pensions, ISAs, or AIM portfolios with potential IHT relief)
  • Take IHT planning advice at the same time as CGT advice

Remember: once the sale completes, many tax planning options close off.

Summary

Selling your business is a complex event — and tax is one of the biggest costs. But with proactive planning, it’s possible to significantly reduce the tax burden and walk away with more of the value you’ve built.

Your Five-Step Checklist Before Selling:

  1. Confirm your eligibility for Business Asset Disposal Relief (BADR)

  2. Review share structure and recent changes

  3. Clean up the company balance sheet and resolve red flags

  4. Plan timing and ownership (e.g. spouse shares) to maximise allowances

  5. Start planning for post-sale tax and estate implications

Selling your company without planning is like selling your house without checking the title deeds. If you’re thinking of exiting in the next 1–3 years, now is the time to act.

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