How to Avoid Tax When Selling Your Business

Complete tax avoidance when selling a business isn’t realistic, and any adviser promising it deserves a healthy dose of scrutiny. What does exist is a meaningful, entirely legal range of planning tools that can reduce tax on selling a business in the UK, defer it, or restructure when and how it falls. The difference in doing so can result in a well-planned exit, potentially making massive savings on a typical transaction.

The catch is timing: most of these tools only work if put in place before the sale is agreed, often 12–24 months ahead. This article looks at how to reduce capital gains tax on selling a business, and covers every major planning lever available for 2026/27, with current rates and worked examples.

What Tax Are You Actually Facing?

These are the taxes that you will face when selling a business in the UK:

Capital Gains Tax: CGT is the primary tax when selling a business. It’s charged on the difference between sale proceeds and your base cost. In 2026/27, CGT on business gains above the basic rate band is 24%, with Business Asset Disposal Relief (BADR) reducing this to 18% on the first £1 million of qualifying lifetime gains.

Corporation Tax: This comes into play on an asset sale. The company pays corporation tax on the gain (25% for profits above £250,000), and the owner then faces a further charge extracting what’s left. This “double taxation” problem makes share sales more attractive for most sellers.

Income Tax: This can apply to earnout payments treated as employment income (payments for services rendered post-sale, rather than deferred consideration for the business itself) rather than as capital gains.

Inheritance Tax: While IHT isn’t payable on the sale itself, it’s the hidden risk many owners don’t anticipate: a business sheltered from IHT under Business Property Relief while trading is replaced by cash or investments after a sale, which are fully within scope for IHT at 40%.

Planning Tool 1: Business Asset Disposal Relief

BADR, the modern successor to Entrepreneurs’ Relief, in place since 2008 – currently gives an 18% rate on the first £1 million of qualifying lifetime gains for 2026/27. The rate has changed three times since 2020, so anyone still planning around an assumed 10% needs to update their numbers.

Qualifying conditions (I.e. 5%+ shareholding, employee or director status, and the trading company test) must be met for the full two years up to the date of disposal, not simply satisfied at a point the seller chooses. On a full £1 million qualifying gain, BADR saves £60,000 compared with the standard rate (£180,000 at 18% versus £240,000 at 24% for CGT).

Common failure points include dilution below 5%, stepping down as a director before the two-year clock finishes, and the trading company test being breached by investment activity. These factors therefore need reviewing at least 12 months before a planned sale, since remedial action is rarely possible once a process has started.

Have you checked when your own two-year clock actually started?

Planning Tool 2: Pre-Sale Pension Contributions

Employer pension contributions reduce a company’s taxable profits before corporation tax applies at 25% (for profits above £250,000). A £60,000 employer contribution, for example, can save £15,000 in corporation tax in the year it’s made. In the 1–2 years before a sale, maximising employer contributions can reduce the tax base, help build the post-sale retirement fund, and be managed alongside valuation considerations.

The pension annual allowance for 2026/27 is £60,000 (combined employer and employee contributions, tapering for higher earners), and unused allowance from the previous three tax years can potentially be carried forward. HMRC does scrutinise pre-sale contribution spikes, so contributions need to be commercially justifiable and consistent with the wider remuneration structure. While useful, this therefore isn’t a lever to pull at the eleventh hour.

Planning Tool 3: Share Sale vs Asset Sale

A share sale is almost always more tax-efficient for the seller: proceeds are taxed as CGT, potentially at BADR rates, with no double taxation and the buyer acquiring the whole entity. An asset sale, by contrast, creates a corporation tax charge at company level, plus a further personal tax charge when what’s left is extracted – as dividends (taxed at up to 39.35% for additional-rate taxpayers) or on liquidation (when CGT is charged, potentially at BADR rates, but on a reduced pot).

It can be useful to see how this works in practice on a hypothetical example. Let’s compare the same £3 million consideration under each structure. Assume a base cost of £200,000 and full BADR availability for illustration.

Share sale: gain of £2,800,000. BADR shelters the first £1,000,000 at 18% (£180,000); the remaining £1,800,000 is taxed at 24% (£432,000). Total CGT: £612,000. Net proceeds to the seller: approximately £2,388,000.

Asset sale: the company sells the assets for £3,000,000, realising broadly the same £2,800,000 gain (ignoring capital allowances complexities for simplicity). Corporation tax at 25% applies above the £250,000 threshold, giving a company-level tax charge of roughly £637,500.

That leaves around £2,362,500 in the company, which then needs to be extracted – say, via a liquidation distribution taxed as a capital gain, potentially with some BADR availability on a reduced pot, or as dividends at up to 39.35% for an additional-rate taxpayer. Even under a relatively favourable extraction route, a further charge in the region of £150,000–£300,000 is common, leaving net proceeds typically somewhere around £2,050,000–£2,200,000.

The precise gap depends heavily on base cost, remaining BADR headroom, and how proceeds are extracted, but on a like-for-like £3 million deal, a share sale can commonly leave a seller somewhere in the region of £200,000–£300,000 better off than an asset sale – which is exactly why most sellers push hard for a share sale, and why a buyer’s preference for an asset sale is a negotiating point worth taking seriously rather than accepting at face value.

Many buyers prefer asset sales for their own reasons (no inherited liability risk, a step-up in capital allowances), but a seller’s negotiating position to insist on a share sale is often stronger than they assume, particularly with more than one interested buyer at the table.

Planning Tool 4: Employee Ownership Trust (EOT)

From 26 November 2025, a qualifying sale to an EOT is 50% exempt from CGT, giving an effective rate of 12% on the qualifying gain (50% × 24%), lower than BADR’s 18% and standard CGT’s 24%.

This is a significant change from what was the previous full exemption, and while an EOT sale remains the most tax-efficient route on a rate basis, the gap has narrowed considerably.

It comes with a structural trade-off. An EOT consideration is almost always deferred, paid from future profits over roughly 3–7 years rather than as a clean lump sum, so it doesn’t suit every seller. Employees can also benefit from up to £3,600 a year in tax-free bonus income under a qualifying scheme.

On a £2 million qualifying gain:

• an EOT sale gives £240,000 of tax;
• a combination of BADR on £1m and standard CGT on the remaining £1m gives £420,000;
• and a sale with no reliefs at all gives £480,000.

Planning Tool 5: EIS Deferral Relief

Reinvesting sale proceeds into qualifying Enterprise Investment Scheme (EIS) companies, within one year before or three years after a disposal, can defer the CGT until the EIS shares are eventually sold. There’s no cap on the amount that can be deferred this way, in principle, the whole gain can be deferred if enough is invested.

It’s worth being clear-eyed, though: EIS investments are higher risk and illiquid, and deferral postpones tax rather than eliminating it. If the underlying company fails, the deferred gain may simply never crystallise.

EIS also carries 30% income tax relief on up to £1 million invested per tax year (£2 million where at least half goes into knowledge-intensive companies) and IHT exemption after two years, making it a multi-purpose tool for post-sale wealth planning as well as CGT deferral.

It’s one of the more powerful tools available for a seller with a large gain and a genuine interest in backing early-stage UK businesses, but it needs specialist advice to navigate properly.

Planning Tool 6: Managing the IHT Exposure After a Sale

A trading business that was fully sheltered from IHT under Business Property Relief while the owner is alive is fully in scope for IHT at 40% above the nil-rate band once the business is sold. This exposure can arise almost immediately: an owner who sells a company for £4 million and dies the following year could face an IHT bill running well into seven figures that simply wouldn’t have existed the year before.

Tools worth considering include:

• lifetime gifting (potentially exempt transfers become fully exempt after seven years, with £3,000 a year immediately exempt)
• discretionary trusts (holding assets outside the donor’s estate, subject to the seven-year rule)
• Venture Capital Trusts (tax-free growth and exempt dividends, though not a direct BPR replacement)
• whole-of-life insurance written in trust (providing a lump sum to cover an expected IHT bill without inflating the estate)
• EIS investments (which, once held for two years, qualify for BPR themselves, a dual CGT-and-IHT tool).

Have you thought about what your own estate would look like the day after a sale completes?

Planning Tool 7: Rollover and Holdover Relief

Rollover Relief allows a gain on business assets to be deferred when proceeds are reinvested in qualifying replacement assets within three years. This is most often used in property or farm/business asset sales where the owner continues trading. Holdover Relief applies to gifts of qualifying business assets, holding over the gain and reducing the recipient’s base cost accordingly, so it can be a useful tool in family succession.

When Your Plan Matters as Much as What You Plan

BADR’s two-year qualifying period means planning has to start at least two years out, not once a sale process is underway. Pre-sale pension contributions are more defensible to HMRC if in place a full year before completion.

EOT planning needs trust documentation, trustee appointment, valuation, and HMRC clearance for which it can be a good idea to allow six to twelve months minimum. And where a gain straddles two tax years, via a completion payment and deferred consideration, timing relative to 5 April can be a legitimate consideration for very large transactions.

Post-sale, making ISA subscriptions at the start of the tax year of completion, rather than the end, maximises the period of tax-free growth.

The Rate Comparison

As an illustration only, on a £2 million qualifying gain (single seller, full BADR lifetime limit available, no prior claims):

In Summary

There’s no single way to avoid tax on a business sale entirely, but there are several legitimate planning tools, BADR, pre-sale pension contributions, transaction structure, EOT, EIS deferral, and post-sale IHT planning. That together can make a material difference to the net outcome.

The common thread is time: every one of these tools works better, and most only work at all, when they’re in place before the sale process begins. If you’re planning how to sell a business in the next one to three years, understanding your current tax position, working out which tools apply, and building a plan that covers both the transaction and what happens to the proceeds afterwards is the most valuable thing you can do now.

If you’d like help working through how to avoid tax when selling a business, or understanding the tax implications for your own transaction, get in touch with First Wealth, we’d be glad to talk it through with you.

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.