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This is a guest article from Omar Aswat, the founder of ASWATAX. Omar is a Leicester lad like me, although these days he’s a Chartered Tax Adviser working across the UK, Saudi Arabia and the UAE. We met on LinkedIn, and he’s one of a couple of tax advisers I trust to look after my clients; we already work together on SEIS and EIS rounds, where he does the tax structuring and the HMRC clearance and I put the legal documents in place. Here’s his view of what a seller should sort out on tax before the legal work on a sale gets going.
What should you sort out on the tax side before you sell your company? Ideally before you agree heads of terms, you should know where you want the money to end up and how it’s going to get there, because that decides a lot of what the legal documents will have to say.
In practice that means checking whether you qualify for Business Asset Disposal Relief, whether anything needs moving out of the company before a buyer takes it on, how the price is going to be paid and when each part of it is taxed, and whether you need any clearances from HMRC. It’s also the point to decide whether the proceeds should come to you personally or stay in a holding company or a family investment company, although that’s a bigger subject than I can cover here. Each of these can change the shape of the deal and most of them take time, so they’re far easier to deal with at the start than halfway through negotiations with a buyer.
What follows is general information, and the right answer for any one company depends on its facts.
Why the tax and the legal documents have to match
The share purchase agreement records who is selling what to whom, what is being paid, and when and in what form. If the tax structure is still moving while that agreement is being negotiated, the two drift apart, and where there’s an HMRC clearance the documents can end up describing something different from what HMRC was told.
A clearance only covers the transaction as it was described in the application. If the buyer asks late on for part of the price to be paid differently, or the sellers decide to keep some assets back, the clearance may no longer fit, and that usually comes to light after completion when it’s much harder to put right. The simplest protection is to agree the tax structure first and treat any later change to it as something to run past your tax adviser before it goes into the agreement.
Business Asset Disposal Relief
Business Asset Disposal Relief (BADR) reduces the rate of capital gains tax on qualifying gains, up to a lifetime limit of £1 million. The rate was 14% for disposals in the 2025/26 tax year and is 18% for disposals from 6 April 2026, and gains above the limit are taxed at the normal capital gains tax rates. The conditions are in section 169I of the Taxation of Chargeable Gains Act 1992. For a sale of shares, broadly, throughout the two years up to the sale the company has to be your personal company (at least 5% of the ordinary shares and votes, with the matching economic entitlement), you have to be an officer or employee of it or of a company in its group, and it has to be a trading company or the holding company of a trading group.
The trading test catches more owners than you’d expect. A company that has built up a lot of surplus cash, or holds investments or let property alongside its trade, can fail it if those activities are substantial. HMRC treats that as a question of fact and degree, and its guidance often uses 20% as a rough indicator, so it’s worth testing the position early rather than assuming it will be fine. If there is a problem, it can often be dealt with before the sale.
The two-year period also matters if the business has been reorganised recently, for example by putting a new holding company on top. The rules can usually look through to the earlier ownership, but that depends on how the reorganisation was done.
Restructuring before the sale
Buyers generally want a clean trading company, and sellers often have things in the company that the buyer doesn’t want, such as a property the owner would rather keep or a cash balance built up over years. That can be dealt with by paying it out as a dividend (taxed as income, which often isn’t the best answer), by moving it into another company, or by a demerger or inserting a new holding company above the trading company.
A holding company structure or a demerger can let the non-trading assets stay with the owner while the trading company is sold, and in the right circumstances without a tax charge on the way. The reliefs that make that work have conditions, though, and the usual practice is to apply to HMRC for clearance first, so you know before you act that HMRC agrees the conditions are met. The steps also have to be done properly and in the right order, and the buyer’s solicitor will want to see them documented.
How the price is paid
How the price is paid affects when the tax is due, and sometimes whether any is due on the day of the sale. Cash on completion is taxed in the tax year of the sale. With deferred consideration and earn-outs the money arrives later, but how they’re taxed depends on whether the amount is fixed or depends on future performance, and with an earn-out a tax charge can arise before you’ve received anything, so the earn-out wording needs checking with that in mind. Loan notes from the buyer can change the timing of the charge depending on their terms, and they carry the risk that the buyer doesn’t pay. Taking shares in the buyer can allow the gain on that part to be deferred, which is common where the buyer is a larger group or a private equity house and the sellers are reinvesting.
Deferral on a share exchange generally depends on section 135 of the Taxation of Chargeable Gains Act 1992 applying, and one of its conditions is that the exchange is for genuine commercial reasons and not part of a scheme to avoid tax. HMRC will confirm that in advance under section 138, and for a significant rollover it’s normally sensible to ask. Deferral also interacts with BADR, so the two need looking at together.
Transactions in securities
Where a sale or reorganisation involves shareholders receiving value in a way that could be treated as income rather than as a capital gain, the transactions in securities rules in Part 13 of the Income Tax Act 2007 can apply. They’re aimed at arrangements whose main purpose is an income tax advantage, but they’re widely worded and can be relevant to demergers, share buybacks and some pre-sale reorganisations. A clearance under section 701 gives comfort that HMRC won’t apply them. It isn’t compulsory, but where the deal is anything other than a straight sale of shares for cash I’d usually recommend applying.
Tax warranties and the tax covenant
The buyer will ask for warranties about the company’s tax affairs and usually a tax covenant, under which the sellers pay for tax liabilities that relate to the period before completion. These sit in the share purchase agreement, but they’re tax provisions in substance, and they’re often where sellers take on the most risk without realising it.
Your tax adviser should look at the tax schedule before it’s agreed, in particular how far the covenant goes and for how long, what can be disclosed against the warranties, the caps and time limits, and who controls a dispute with HMRC (you’ll want some say in that if you’re the one paying). The disclosure letter should reflect the company’s real tax position, and if there are gaps in its tax compliance it’s better to find them and, where appropriate, put them right before the buyer’s due diligence finds them for you.
Timing
HMRC aims to answer clearance applications within 30 days, and it takes longer if HMRC has questions. A restructure plus a clearance can therefore take a couple of months from start to finish, which isn’t something to leave until a buyer has been found and is pushing for completion. If you’re thinking of selling in the next year or so, it’s worth speaking to your tax adviser now, and the same goes for the rest of your exit planning.
Working with your solicitor
A sale runs best when the tax adviser and the solicitor work from the same set of facts. That means sharing the clearance applications and HMRC’s replies with your solicitor before the share purchase agreement is drafted, so the documents match what HMRC was told, and asking your solicitor to flag any change to the structure, the price or the parties as soon as it’s proposed, so it can come back to your tax adviser before anyone signs.
Once the structure is agreed and any clearances are in, Steven deals with the legal side, which means the share purchase agreement, the disclosure letter, the buyer’s due diligence questions and completion. With the tax groundwork done, he can do that without the structure changing under him halfway through.
About Omar
Omar Aswat is a Chartered Tax Adviser working across the UK, Saudi Arabia and the UAE, and the founder of ASWATAX, which advises owner-managed businesses, families and investors on restructures, business sales, demergers, holding companies and HMRC clearances. Its work on company sales is done through Transaction Tax Partners.
Written by Omar Aswat, Chartered Tax Adviser and founder of ASWATAX, as a guest article. This is general information, not tax or legal advice on your situation. Law correct as at .
