How much tax do you pay when you sell your business?

The main tax on selling a business is Capital Gains Tax (CGT). If you qualify for Business Asset Disposal Relief (BADR), CGT is charged at 14% on gains up to £1 million lifetime (rising to 18% from April 2027). Without BADR or any other reliefs, the CGT rate is 18% (basic rate) or 24% (higher rate) for shares and business assets sold from 30 October 2024 onwards. On a £500,000 gain, BADR could save you £50,000 compared to paying standard 24% CGT.

What is the difference between an asset sale and a share sale?

An asset sale means the buyer purchases the individual assets of the business (goodwill, equipment, stock, contracts), not the company itself. The proceeds go to the company, which may then distribute them via dividends or on winding up — triggering further tax. A share sale means the buyer purchases the shares in your limited company, which changes ownership of everything within it. Share sales typically allow sellers to claim BADR more cleanly, but buyers often prefer asset sales because they acquire assets at current market value for future depreciation.

Do you pay VAT when selling a business?

The sale of a business as a going concern (TOGC) is outside the scope of VAT — no VAT is charged on the sale price. For TOGC treatment to apply, the buyer must be purchasing the business as a going concern, the same kind of business must continue, and the buyer must be VAT registered (or become so on completion). If TOGC conditions are not met, VAT may be payable on the assets being sold. Take specialist VAT advice before any business sale.

What is an earn-out and how is it taxed?

An earn-out is where part of the sale price is paid later, based on the future performance of the business — typically over 1–3 years after completion. HMRC treats earn-out payments as capital proceeds if they are a right to receive a future uncertain consideration. Initial valuation at the time of sale is used for CGT, and if actual payments differ, there may be later adjustments. Some earn-out structures can inadvertently create employment income if the seller stays on and HMRC considers the earn-out to be remuneration.

Tax When Selling a Business in the UK: Your Complete Guide (2026/27)

When you sell a UK business, several significant taxes apply — Capital Gains Tax, Business Asset Disposal Relief, VAT, and income tax on earn-outs. This guide explains every tax consideration when selling a sole trader business, a partnership, or a limited company, including BADR, asset versus share sales, and how to minimise the tax bill.

By PocketWise · 14 April 2026 · 6 min read

Selling a business is one of the largest financial events in an entrepreneur’s life — and one of the most tax-laden. Get the planning right and you could save tens or hundreds of thousands of pounds. Get it wrong and you might pay CGT at the wrong rate, miss BADR, or trigger unexpected VAT.

This guide covers every tax that applies when selling a UK business, with worked examples across the main business structures.

This is not tax advice. Selling a business requires specialist professional advice. Speak to a tax adviser and accountant well before you agree a price or heads of terms.

The Main Taxes on a Business Sale

Tax	Applies when	Rate
Capital Gains Tax (CGT)	Gain on sale of business/shares	14–24% depending on type and qualifications
Income tax	Earn-outs received as employment income; asset sales by sole traders	Up to 45%
VAT	Asset sales not qualifying as TOGC	20% on standard-rated assets
Employer NI	If earn-out deemed employment income	15% (employer)
Corporation tax	Company sells its assets (not a share sale)	19–25%
Income tax (dividend)	Company distributes sale proceeds as a dividend	8.75–39.35%

Business Asset Disposal Relief (BADR)

BADR is the most important tax relief for business sellers. It reduces CGT on qualifying gains to:

14% from 6 April 2025 to 5 April 2026 (rate is currently 14%)
14% for 2026/27 also (confirmed, not yet changed)
18% from 6 April 2027

The normal CGT rate on business assets is 24% for higher/additional rate taxpayers.

Gain size	Without BADR (24%)	With BADR (14%)	Saving
£250,000	£60,000	£35,000	£25,000
£500,000	£120,000	£70,000	£50,000
£1,000,000	£240,000	£140,000	£100,000

The lifetime limit is £1 million of qualifying gains. Once used, any further gains on business sales are taxed at the normal CGT rate.

BADR: Who Qualifies?

See the full Business Asset Disposal Relief Guide for details. In summary:

Sole traders/partnerships: Must have owned the business for at least 2 years
Company shareholders: Must hold 5%+ of ordinary shares, be an officer or employee, and have met these conditions for at least 2 years
Timing: You must have disposed of the business assets or shares within 3 years of ceasing to trade

Sole Trader and Partnership Sale

When you sell a sole trader business:

Each asset is valued individually — goodwill, premises, equipment, stock
You pay CGT on any gain on business assets (fixtures, goodwill, premises if they have risen in value)
Any stock sold is taxed as income (business income), not capital
Business premises — CGT applies on gain; principal private residence relief does NOT apply to business elements

Example: Sole trader bakery sale

Goodwill: £80,000 (CGT applies; qualifies for BADR)
Equipment (written-down value): £15,000, sold for £25,000 → balancing charge = income tax
Stock: £8,000 → income tax
Total CGT gain: £80,000 (goodwill) − £0 base cost = £80,000

With BADR at 14%: £11,200 tax Without BADR at 24%: £19,200 tax

The buyer purchases your shares. You realise a capital gain equal to the sale price minus your original share cost (plus any additional contributions).

Seller: clean exit, CGT at 14% (BADR), or 18%/24% without
Buyer: takes on whole company including historic liabilities
BADR: can be claimed if conditions met; typically cleaner than asset sale

Example: Julia sold her 100% stake in a digital marketing agency for £650,000. Original share cost: £1,000. Qualifying for BADR.

Gain: £649,000
CGT at 14%: £90,860
CGT without BADR at 24%: £155,760
BADR saving: £64,900

Asset Sale (via company)

The buyer purchases the company’s assets. The company receives the sale proceeds, not Julia personally.

Company pays corporation tax on any gain on assets sold (19–25%)
Julia extracts the proceeds via dividends or a winding-up distribution — additional dividend tax or income tax applies
Total effective tax rate is often higher than a direct share sale

In many asset sale scenarios, sellers face 25% corporation tax + 39.35% dividend tax = very high effective rates. BADR can be claimed on a winding-up distribution if Entrepreneurs’ Relief conditions are met, but this requires careful structuring.

VAT on Business Sales: The TOGC Rules

When you sell a business as a going concern (TOGC), no VAT is charged on the sale. This applies if:

The buyer is purchasing a going concern (same type of business)
The buyer is registered for VAT (or registers on completion)
The seller and buyer agree that TOGC treatment applies

Failure to structure the sale as a TOGC means VAT at 20% on the standard-rated assets. On a £500,000 asset sale, that is £100,000 of VAT — potentially recoverable by the buyer, but generating a cash flow burden and risk if the buyer cannot reclaim it.

Earn-Outs: Tax Complexity

Earn-outs are common in professional services and technology businesses. They defer part of the consideration, payable if the business hits certain targets after the sale.

Capital or Income?

Earn-out type	Tax treatment
Pure performance target, seller not employed post-sale	Usually CGT (capital)
Seller stays on post-sale as employee; earn-out based on performance	HMRC may treat as employment income — up to 45%
Guaranteed minimum earn-out on top of fixed price	Capital on the fixed element; depends on structure for earn-out

HMRC’s Position

HMRC looks at whether the earn-out is truly “capital” (fair compensation for the value transferred) or whether it functions as deferred remuneration for the seller’s continued services. If the seller is required to stay in employment and the earn-out is contingent on staying, HMRC is more likely to treat it as employment income.

Goodwill and Entrepreneurs

Goodwill in an unincorporated business (sole trader or partnership) is typically CGT-qualifying and eligible for BADR.

Goodwill in a company that was previously personally owned creates complex intangibles rules — corporation tax on company-level gain, then dividend tax on extraction. This is why some business sales are structured carefully around the entity type.

Pre-Sale Planning Checklist

Action	Benefit
Check BADR qualification at least 2 years before sale	Ensure the 2-year ownership test is met
Plan sale date to use BADR before April 2027 (rate rises to 18%)	Save up to £40,000 on full £1m allowance
Consider Investors’ Relief for investor-shareholders	14% on external investors’ gains up to £10m
Structure as a share sale rather than asset sale	Typically more tax-efficient for the seller
Review earn-out structure with tax adviser	Avoid accidental employment income treatment
Confirm TOGC treatment for VAT	Avoid unnecessary 20% VAT on assets
Transfer shares to spouse before sale if they have BADR capacity	Double the effective BADR allowance to £2m