How entrepreneurs could be paying over 50 per cent tax when selling their business

Entrepreneurs selling their businesses could be paying tax of more than 50 per cent on the sale, suggesting that the current capital gains tax (CGT) system is still tough on some sellers.

There is mounting pressure from the business community to reduce the 50 per cent highest earners income tax rate, which many claim is deterring entrepreneurs from doing business in the UK. Some business leaders, however, have also claimed that keeping CGT at its current low rate of 28 per cent (and just 10 per cent for the first £10 million) is more important to entrepreneurs than the income tax rate.
Despite appearances, this ‘low’ level of CGT does not significantly benefit most exiting entrepreneurs. In fact, the low level of CGT only offers a limited benefit to entrepreneurs and keeping the tax charged on capital gains at current levels is not a substitute in itself for the lowering of the top income tax rate.

For an incorporated business, corporation tax will be payable at as much as 26 per cent of all assets. If the company is not wound up and the proceeds of a sale are distributed to the shareholders as dividends, the proceeds are taxable at 36.11 per cent. This scenario will bring the total paid in tax to more than the 50 per cent higher income tax rate.
Mr Heynes of consultancy firm Baker Tilly agreed, adding that the lower CGT rates only truly benefit firms that generate “additional wealth-producing assets”. He added that most entrepreneurs - even those who do opt to wind their company up at the point of sale - will be taxed at least 33.4 per cent in total, even if they apply for entrepreneurs relief, which brings the CGT down to 10 per cent.

In addition, firms that can benefit from the lower rate of CGT may find that they are unable to achieve the price they were hoping for as buyers will be aware of the higher tax that will be payable on the asset in the future.



Outlined below are two scenarios that illustrate how tax payable can increase to over 50 per cent in some cases. Let’s assume that the directors want to keep the business running, rather than winding it up. This may arise, for instance, where the company owns a property or separate business that the owners wanted to preclude from the sale.

Here, the post-tax sale proceeds of £740,000 will be simply distributed to the owners as dividends, incurring tax at 36.11 per cent (the effective dividend tax rate for individuals earning £150k or more). That means a further £267,214 will be paid in tax, bringing the total tax take to £527,214 or 52.72 per cent.

In this scenario, it is clear that the current CGT system is not beneficial enough to British-based entrepreneurs to be used as an argument for the retention of the 50 per cent higher rate of income tax.


Mr Smith and his two fellow shareholders in ABC Ltd have agreed that the time has come to sell their business. They have all reached retirement age and want to cash in and spend the proceeds of their many years of hard work. They have been fortunate in being able to find a company, XYZ Ltd, who is willing to pay the asking price.

However XYZ Ltd only want to buy the assets and goodwill of ABC Ltd, not the shares of the company. In addition to strategic considerations there are several reasons why XYZ Ltd do not want to buy the whole company. Firstly, they are concerned about potential liabilities that might arise in the future as a result of past dealings. There aren’t any specific areas to warrant investigation, however they would rather not take the chance.

The buyer’s solicitors have said that this can be covered under an indemnity clause in the purchase agreement, but the view of the directors of XYZ Ltd is that the indemnity is only as solid as the willingness and ability of the vendors to pay. They have had post-sale problems with their last acquisition and don’t want a repeat. There is an issue with several of the employees, in that they are not wanted nor required by the purchaser in the future running of the business. And lastly, the due diligence costs will be considerably reduced under an asset sale. So Mr Smith and his co-owners reluctantly agreed to sell the assets of their company, ABC Ltd, for £1,000,000.

What is the tax liability for the vendors? The business owns the assets, so the business is taxed under the normal corporation tax rate of 26 per cent. They will therefore lose 26 per cent, or £260,000 to corporation tax. Because the business has now sold all its assets and Mr Smith wants to take advantage of Entrepreneurs’ Relief, he decides to wind the business up and distribute the capital to the owners. The balance of £740,000 will be distributed to the owners and taxed at the 10 per cent rate (none of the shareholders own less than 5 per cent of the company, so all are entitled to claim Entrepreneurs’ Relief).

That’s another £74,000 to the government. So from £1m sale proceeds, Mr Smith et al are left with a total of £666,000 – an effective tax rate of 33.4 per cent.

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