Q: I plan to sell my share of the business to my business partner. Financial year end is 31/12/2011. What income tax am I due to pay personally and when?
Nov 24 2011
Answered by: Chas Roy-Chowdhury Ask a question
Well, when you pay is affected by when you sell; the business's financial year won't affect the tax payment date. That will be January 31st following the tax year of disposal – so if you sell before Apri 5th 2012, January 31st 2013, or if you wait until the new tax year on April 6th 2012 (but before April 5th 2013) the tax will be due on January 31st 2014. If you don't already fill out a self-assessment tax return you'll need to contact HMRC to ask them for one.
As for how much income tax, the good news is that there probably won't be as much as you feared, and the rules are much simpler than they used to be; no more taper relief or indexation (be thankful if you've no idea what they were). Provided you've owned and worked in the business for at least the last year, you should qualify for Entrepreneurs' Relief on gains up to £10,000,000 on disposal of any business assets (whether shares in a company or trading assets such as buildings or goodwill), which cuts the tax rate to 10 per cent. The rules are a little stricter for shares, but there's plenty of guidance on HMRC's website. If you own a mixture of assets (say, the company premises and some shares) you'll need to check each asset separately to make sure they qualify, otherwise you'll pay tax at the full rate of 28 per cent.
You'll need to calculate all the separate gains, which is relatively easy for shares, but may involve more work for eg goodwill or if you are in a partnership; you would have to check the terms of your partnership agreement. There are instructions in the tax return and notes. Once you know all the gains, you aggregate them, knock off your annual exempt amount (£10,600) on which you pay no tax at all, then pay tax at 10 per cent on the balance of gains qualifying for Entrepreneurs' Relief up to £10,000,000. Gains on qualifying assets over £10,000,000 are chargeable at 28 per cent, as are any assets which do not qualify.
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