The Tax Implications of Selling Your Business

/Published:13th April 2026/inBusiness, Running a business, Tax
Accounting Wise - the tax implications of selling your business

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Selling a business is one of the most significant financial events in an entrepreneur’s life. After years of building something from the ground up, the way you structure and time a sale can make an enormous difference to how much of the proceeds you actually keep. The tax landscape for business disposals has changed considerably in recent years, and in 2026/27 business owners face a fundamentally tougher CGT environment than even two or three years ago.

This post looks at the key tax considerations when selling a UK business, with a particular focus on Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief), the most important relief available to qualifying business owners, alongside other planning points that can reduce your overall liability.

Understanding Capital Gains Tax on a Business Sale

When you sell a business or your shares in a limited company, the profit you make is generally subject to Capital Gains Tax (CGT) rather than Income Tax. CGT is charged on the gain you make, not the total sale proceeds. The gain is calculated by deducting the original cost of the asset, known as the base cost, along with any allowable costs incurred in acquiring or disposing of it, from the sale price.

For the 2026/27 tax year, the standard CGT rates that apply to business disposals are 18% for gains falling within the basic rate income tax band, and 24% for higher and additional rate taxpayers. These rates apply after the annual CGT exemption, which stands at £3,000 for 2026/27, a historic low reduced from £12,300 as recently as 2022/23. For any business sale of meaningful size, the annual exemption will shelter only a small portion of the overall gain.

If you qualify for Business Asset Disposal Relief, a reduced rate of 18% applies to the first £1 million of qualifying gains. As discussed below, this rate now matches the standard basic rate, making the relief less impactful than it once was.

Important: The date of disposal for CGT purposes is generally the date contracts are exchanged, not the date of completion. Where the timing of a sale straddles a tax year end, this distinction can be critical.

What Is Business Asset Disposal Relief?

Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief until April 2020, is a CGT relief that reduces the rate of tax on qualifying gains. It is the most significant relief available to UK business owners on a disposal and is administered by HMRC. The relief does not apply automatically and must be actively claimed through your Self Assessment tax return.

How the BADR rate has changed

The rate of BADR has increased significantly over the past two years following announcements made in the Autumn Budget 2024. The history is as follows:

  • Disposals on or before 5 April 2025: 10%
  • Disposals between 6 April 2025 and 5 April 2026: 14%
  • Disposals on or after 6 April 2026: 18%

For disposals made in 2026/27, the BADR rate of 18% now equals the standard basic rate of CGT. This means BADR no longer produces a differential against the basic rate. Its value now lies in capping the tax rate at 18% for qualifying higher and additional rate taxpayers who would otherwise pay 24% on their gains. HMRC’s CGT rates and allowances page on GOV.UK sets out the current position in full.

The lifetime limit and maximum saving

BADR applies to a lifetime limit of £1 million of qualifying gains. This limit has not changed, but the value of the relief has diminished as the rate has risen. At the previous rate of 10%, the maximum tax saving from BADR over a lifetime was £100,000 compared to paying 24% on the same gain. At the current rate of 18%, the maximum saving for a higher rate taxpayer has reduced to £60,000. For basic rate taxpayers, BADR now provides no saving at all against the standard 18% rate. Its value is confined to those who would otherwise pay at 24%.

If you have made previous claims for BADR or Entrepreneurs’ Relief, those earlier claims count against your £1 million lifetime limit.

Planning point: While BADR remains worth claiming for higher and additional rate taxpayers, the increased rate means it should no longer be treated as a given route to a low tax bill. Broader tax planning, including deal structure, use of pension contributions, timing across tax years, and spousal transfers, has become proportionally more important.

Who Qualifies for Business Asset Disposal Relief?

There are strict qualifying conditions for BADR, and they differ depending on whether you are selling a sole trader business, a partnership interest, or shares in a limited company.

Qualifying conditions for sole traders and partnerships

If you are selling an unincorporated business as a sole trader or partner, you must meet all of the following throughout the two years ending on the date of disposal:

  • The business must be a trading business, not an investment business
  • You must be the sole trader or a partner in the business
  • The business must have been owned for at least two years

BADR is also available where you sell assets used in a business that has ceased, provided the assets were in use at the time the business stopped trading and the disposal takes place within three years of cessation.

Qualifying conditions for limited company shareholders

If you are selling shares in a limited company, the qualifying conditions apply throughout the two years ending on the date of disposal. You must meet all of the following:

  • The company must be a trading company, or the holding company of a trading group
  • You must be an employee or officer (including a director) of the company
  • You must hold at least 5% of the ordinary share capital
  • Your shares must carry at least 5% of the voting rights
  • You must be entitled to at least 5% of the distributable profits and at least 5% of the assets on a winding up

The two-year qualifying period is a common source of problems. If you incorporated your business or restructured your share ownership less than two years before the sale, you may not qualify, even if you have run the underlying business for many years. Restructuring well in advance of a planned sale is therefore essential.

What counts as a trading company?

A company qualifies as a trading company if it carries on trading activities and those activities do not include to a substantial extent activities that are not trading, such as holding investments or significant cash reserves. HMRC generally interprets “substantial” as more than 20% of the company’s activities being non-trading in nature.

This can catch out companies that have built up investment assets, large cash balances, or property alongside their trading operations. HMRC’s Capital Gains Manual at CG64090 sets out its published view on the trading company condition. If your company holds substantial non-trading assets, take advice before assuming you will qualify.

Associated disposals

It is not uncommon for business assets, particularly the premises from which a company trades, to be held personally by a director outside the company. BADR may be available on the disposal of such assets under the associated disposals rules, where the individual has made a material disposal as part of their withdrawal from the business. The rules in this area are specific and should be reviewed carefully with a tax adviser.

Structuring the Sale: Asset Sale vs Share Sale

One of the most consequential decisions when selling a limited company is whether the transaction is structured as an asset sale or a share sale. The tax treatment differs significantly between the two.

Share sale

In a share sale, the buyer acquires the shares in the company. The seller disposes of the shares and is subject to CGT on any gain. This is typically the preferred structure for sellers because it allows BADR to be claimed on qualifying gains, and the full proceeds are received personally by the shareholder. There is no double layer of tax. The gain is realised once, at the shareholder level.

Asset sale

In an asset sale, the company sells its underlying assets, which may include goodwill, equipment, contracts, and intellectual property. The proceeds remain within the company, and the company pays Corporation Tax at up to 25% on any gains arising. If the remaining cash is then extracted by the shareholders as a dividend, it is subject to further tax at dividend rates. The dividend allowance is now just £500 for 2026/27, and dividend tax rates for higher rate taxpayers stand at 33.75%. This double layer of taxation makes asset sales generally significantly less tax-efficient for sellers.

That said, buyers often prefer asset sales because they can step up the base cost of the assets for their own tax purposes. The final structure is usually the result of negotiation between the parties and their advisers, and it is common for sellers to seek a higher headline price in an asset sale to compensate for the less favourable tax treatment.

Planning point: Always model the after-tax proceeds under both an asset sale and a share sale before agreeing heads of terms. The difference can be substantial, particularly for higher rate taxpayers.

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Other Reliefs and Planning Opportunities

BADR is the most well-known relief for business sellers, but it is not the only planning tool available. Given that the BADR rate has now risen to 18%, other strategies carry greater relative importance than they did when BADR offered a 10% rate.

Investors’ Relief

Investors’ Relief is a separate CGT relief aimed at external investors rather than owner-managers. For 2026/27, it carries the same 18% rate as BADR and has its own lifetime limit of £1 million, reduced from £10 million for qualifying disposals made on or after 30 October 2024. It applies to gains from the disposal of qualifying shares in unlisted trading companies where the individual subscribed for the shares and is not an employee or paid director. It is worth considering where external shareholders hold qualifying stakes.

EIS and SEIS reliefs

Where the proceeds of a business sale are reinvested into qualifying shares under the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS), it may be possible to defer or reduce CGT on the disposal. EIS deferral relief allows gains to be deferred by reinvesting proceeds into qualifying EIS shares. SEIS offers an exemption of up to 50% of gains on disposals of assets if reinvested into qualifying SEIS shares, subject to a cap. These are complex reliefs and specialist advice is essential, but they can be a powerful planning tool for business owners who intend to invest in early-stage companies after an exit.

Business Asset Rollover Relief

If you are not selling outright but reinvesting the proceeds into a new qualifying business asset, Business Asset Rollover Relief allows you to defer the CGT that would otherwise arise. The gain is rolled into the base cost of the new asset, deferring but not eliminating the tax until that asset is eventually disposed of. This is a useful tool if you are planning to reinvest rather than retire.

Pension contributions

Making pension contributions in the tax year of disposal can reduce your adjusted net income, potentially keeping more of your gain within the basic rate band and reducing the overall CGT charge. Higher rate taxpayers can also reclaim Income Tax relief on pension contributions at 40%, making this a particularly effective planning tool alongside a business sale. Contributions in the years leading up to a sale are worth planning carefully with a financial adviser. The annual pension allowance for 2026/27 remains £60,000, subject to the tapered annual allowance for higher earners.

Spousal and civil partner transfers

Transfers between spouses and civil partners are made on a no gain, no loss basis for CGT purposes. Before a disposal, transferring a portion of shares to a spouse or civil partner allows both parties to use their annual CGT exemptions and basic rate bands against the combined gain. Given that both the annual exemption (£3,000 each) and the basic rate band are use-it-or-lose-it, this remains one of the more accessible planning tools available to owner-managed businesses where the spouse or civil partner is not already a shareholder.

Gift Hold-Over Relief

If you are transferring your business or shares to a family member or into a trust rather than selling at full market value, Gift Hold-Over Relief may allow the gain to be held over. The recipient takes the asset at the transferor’s original base cost, with the gain deferred until they eventually dispose of it. This can form part of a longer-term succession plan, though Inheritance Tax and other considerations must also be weighed carefully.

Enterprise Management Incentive shares

If your company operates an Enterprise Management Incentive (EMI) share option scheme, employees who hold qualifying options may benefit from BADR on their gains on sale, even where they hold less than 5% of the ordinary share capital, provided the options were granted at least two years before the disposal. EMI schemes can therefore be a powerful tool for rewarding key employees in a tax-efficient way while improving the overall attractiveness of the business to both staff and buyers.

Timing of the disposal

Because CGT is assessed in the tax year of disposal, careful timing can make a meaningful difference, particularly where a sale is being negotiated across a tax year end. If your income is likely to be lower in the following tax year, deferring exchange of contracts into that year could keep more of the gain within the basic rate band. Equally, if you have capital losses carried forward from prior years, these can be offset against the gain in the year of disposal to reduce the overall charge.

Inheritance Tax and Business Property Relief: An Emerging Consideration

Although Inheritance Tax (IHT) is not triggered by a sale during your lifetime, the changes to Business Property Relief (BPR) from April 2026 are relevant context for any business owner thinking about succession and exit planning. From April 2026, Business Property Relief has been restricted. Business assets above £1 million now attract IHT at an effective rate of 20% on the excess, rather than being fully exempt as they were previously.

This matters in the context of a business sale because selling the business converts a potentially IHT-exempt asset into cash, which is fully within the estate for IHT purposes. For business owners with estates that are already potentially subject to IHT, the decision to sell and what to do with the proceeds should be considered in conjunction with estate planning advice, not just CGT planning.

The Role of Earn-Outs

In many business sales, a proportion of the consideration is paid as an earn-out, which is deferred consideration linked to the business hitting performance targets after completion. Earn-outs introduce significant complexity into the tax treatment of a sale.

If the earn-out is ascertainable at the date of exchange, meaning the amount can be calculated or estimated with reasonable certainty, it is generally treated as part of the capital proceeds and brought into account for CGT in the year of disposal. If it is unascertainable, it may be treated as a separate right that is itself a chargeable asset, with CGT arising when the earn-out payments are received or settled.

If an earn-out requires you to remain employed in the business and the payments are linked to your continued services, HMRC may seek to tax some or all of the earn-out as employment income rather than capital, which would be subject to Income Tax and National Insurance at much higher rates. This is a complex and contested area, and specialist advice is strongly recommended if your deal includes any form of deferred or contingent consideration. The ICAEW’s technical guidance on capital gains tax provides further reading for those navigating this area.

Claiming Business Asset Disposal Relief

BADR is claimed through your Self Assessment tax return for the tax year in which the disposal takes place. You must complete the capital gains pages and indicate that you are claiming the relief. Supporting documentation, including details of the business, the date of disposal, and evidence that the qualifying conditions have been met throughout the two-year qualifying period, should be retained in case HMRC raises an enquiry.

The deadline for claiming BADR is the first anniversary of the 31 January following the end of the tax year in which the disposal occurred. For a disposal in the 2026/27 tax year, the claim deadline is 31 January 2029. Missing this deadline means the relief is lost permanently for that disposal.

It is also worth noting that from April 2026, Making Tax Digital for Income Tax applies to sole traders and landlords with qualifying income above £50,000. If you are a sole trader selling your business, your filing obligations in the year of disposal may be subject to MTD requirements. The GOV.UK guidance on Making Tax Digital for Income Tax sets out who is affected and what is required.

Planning point: Do not assume your accountant will automatically claim BADR on your behalf. Discuss it explicitly before your tax return is filed, particularly if the disposal took place close to the tax year end and your return is being prepared under time pressure.

Final Thoughts on the Tax Implications of Selling Your Business

Selling a business involves some of the most complex tax decisions you will ever face. Business Asset Disposal Relief remains the most important CGT relief for qualifying sellers, but at 18% for 2026/27 it is considerably less generous than it was at its 10% peak. For higher rate taxpayers the saving remains real, up to £60,000 over a lifetime, but for basic rate taxpayers the relief now offers no differential advantage on rate.

The key takeaways are clear: plan early, take specialist accounting and tax advice, ensure the qualifying conditions for BADR are in place well in advance of any sale, and model the after-tax position carefully under different deal structures. Consider pension contributions, spousal transfers, EIS or SEIS reinvestment, and the IHT implications of converting business assets into cash. The difference between a well-planned and a poorly-planned exit can be substantial, and in a tax environment that has tightened significantly since 2024, the margin for error is smaller than ever.

If you are considering selling your business and want to ensure your company structure is as tax-efficient as possible ahead of a disposal, Accounting Wise can help you understand your options from the ground up.

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Tax Implications of Selling Your Business FAQ

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Yes, but with important caveats. For higher and additional rate taxpayers, BADR reduces the CGT rate from 24% to 18% on the first £1 million of qualifying gains, a maximum saving of £60,000. For basic rate taxpayers, BADR now provides no saving, since the standard basic rate of CGT is also 18%. The relief is still meaningful for those who would otherwise pay at 24%, but it is no longer the transformative planning tool it was when the rate stood at 10%.

It depends on the nature of the partial disposal. If you are selling shares, a partial sale can still qualify for BADR provided you continue to meet the qualifying conditions, including the 5% shareholding threshold, throughout the two years ending on the date of disposal. For sole traders and partners, BADR on a partial disposal is more restrictive and generally requires the disposal of the whole or a distinct part of the business.

For sole traders and partners selling an unincorporated business, goodwill is a qualifying asset for BADR purposes. For limited companies, goodwill disposed of by the company in an asset sale is subject to Corporation Tax rather than CGT. BADR is only available on the shareholder’s gain on shares, not on the company’s own asset disposals.

If you have exhausted your lifetime limit through previous claims, further qualifying gains will be taxed at the standard CGT rates of 18% or 24% depending on your income in the year of disposal. In this situation, pension contributions, spousal transfers, EIS and SEIS reinvestment, and careful timing of the disposal across tax years become the primary planning tools.

Generally, no. Where the proceeds are treated as a capital gain, they are not subject to National Insurance contributions. However, if HMRC determines that any part of the consideration should be treated as employment income, for example in certain earn-out arrangements linked to continued service, that portion could be subject to both Income Tax and National Insurance. This is another reason why deal structuring matters significantly from a tax perspective.

The primary sources are HMRC’s Business Asset Disposal Relief guidance on GOV.UK, the CGT guidance pages on GOV.UK, and HMRC’s Capital Gains Manual for more technical reading. The Autumn Budget 2024 documentation sets out the policy background to the BADR rate changes.

Glossary of Key Terms

Business Asset Disposal Relief (BADR) – A Capital Gains Tax relief that reduces the rate of tax on qualifying gains from the sale of a business or shares in a trading company. For disposals made on or after 6 April 2026, the rate is 18%. Formerly known as Entrepreneurs' Relief.
Capital Gains Tax (CGT) – The tax charged on the profit you make when you sell or dispose of an asset that has increased in value. It is the gain that is taxed, not the total sale proceeds.
Base Cost – The original cost of acquiring an asset, used to calculate the gain on disposal. Allowable costs of acquisition and disposal can also be deducted.
Annual Exempt Amount (AEA) – The tax-free CGT allowance available to individuals each tax year. For 2026/27 this is £3,000. Gains below this threshold are not subject to CGT and the allowance cannot be carried forward.
Lifetime Limit – The maximum total amount of gains on which BADR can be claimed across an individual's lifetime. The current limit is £1 million. Previous claims under Entrepreneurs' Relief count towards this figure.
Share Sale – A transaction in which the buyer acquires the shares in a company rather than its underlying assets. The seller pays CGT on any gain and this is generally the most tax-efficient structure for sellers.
Asset Sale – A transaction in which the company sells its underlying assets such as goodwill, equipment, and contracts. The company pays Corporation Tax on any gains, and further tax may arise when profits are extracted by shareholders as dividends.
Earn-Out – A deferred element of the sale price paid after completion, usually linked to the future performance of the business. The tax treatment depends on whether the amount is ascertainable at the date of exchange.
Investors' Relief (IR) – A separate CGT relief available to external investors in unlisted trading companies who are not employees or paid directors. For 2026/27 the rate is 18%, with a lifetime limit of £1 million.
Business Asset Rollover Relief – A relief that allows CGT to be deferred when you sell a qualifying business asset and reinvest the proceeds into a new qualifying asset. The gain rolls into the base cost of the replacement asset.
Gift Hold-Over Relief – A relief available when business assets or shares are gifted or transferred at below market value. The gain is passed to the recipient and deferred until they dispose of the asset.
Enterprise Investment Scheme (EIS) – A government scheme offering tax reliefs to investors in qualifying smaller companies. Reinvesting sale proceeds into EIS shares can allow CGT to be deferred.
Seed Enterprise Investment Scheme (SEIS) – A scheme similar to EIS but aimed at very early-stage companies. Investing in qualifying SEIS shares can provide a CGT exemption of up to 50% on gains reinvested, subject to limits.
Enterprise Management Incentive (EMI) – A tax-advantaged employee share option scheme. Employees with qualifying EMI options may be eligible for BADR on gains at sale, even where they hold less than 5% of the share capital.
Trading Company – For BADR purposes, a company whose activities consist wholly or mainly of trading rather than non-trading activities such as holding investments. HMRC generally treats more than 20% non-trading activity as disqualifying.
Two-Year Qualifying Period – The minimum period during which BADR conditions must be met before a disposal qualifies for relief. The conditions must have been satisfied throughout the two years ending on the date of disposal.
Associated Disposal – The disposal of an asset used in a business but held personally by the owner outside the company, such as trading premises. BADR may be available on an associated disposal where a material disposal of business assets is also being made.
Business Property Relief (BPR) – An Inheritance Tax relief on qualifying business assets. From April 2026, BPR has been restricted so that business assets above £1 million attract IHT at an effective rate of 20% on the excess.
No Gain, No Loss Transfer – The CGT treatment that applies to transfers between spouses and civil partners. No CGT arises on the transfer itself and the recipient takes the asset at the transferor's original base cost.
Self Assessment – The HMRC system through which individuals report income, gains, and other tax liabilities each year. BADR must be claimed through the capital gains pages of the Self Assessment return for the tax year of disposal.
Heads of Terms – A preliminary document setting out the agreed key terms of a business sale before formal contracts are drafted. Not usually legally binding, but important in establishing the structure and tax treatment of the deal.
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