Tax Applicability at Various Business Stages: A Comprehensive Guide
There are 5 different stages during the lifecycle of a business, and each stage is affected by a different tax charge or relief. Please keep in mind that, it is always recommended you seek professional tax advice to suit your specific business needs.
STARTUP
In the startup stage, the business will be set up and the founder needs to decide what type of structure is more convenient for the business; whether it’s a limited company or a sole trader or a partnership will affect what type of tax will be paid. During this stage, owners as individuals will not face any tax charge or tax relief for the money that they have invested.
INCORPORATION
This stage takes place if the founder decides to pass the assets and liabilities to a limited company. Consideration can be given by the company by the issue of new shares or cash and the issue of debt.
Once it starts trading as a limited company, it will face Corporation Tax. Prior to that, Capital Gains Tax will be charged & Capital Gains Tax Rollover will be available as tax relief.
FINANCE
During this stage, capital to fund the business’ growth is needed. There are different methods to get the capital needed, including getting a bank loan, asking family & friends, business angels (individuals who make serial investments), crowdfunding or by private equity (Venture capital funds or Private equity houses).
No tax charge will be applicable during this stage. There are some reliefs available.
SUCCESSION
This often involves the transfer of a business, by passing on shares to enable the business to continue under the ownership of the family or chosen successor. Selling the business at market value does not equal succession.
Two different types of tax charges can be applicable here.
Inheritance Tax - no tax will be paid during the transfer, as the gift of a business to an individual during the transferor’s lifetime will be potentially exempt, unless the transferor dies within 7 years of the transfer, in that case, the gift will be no longer exempt.
The other type of tax charge depends on the structure of the business:
Capital Gains Tax (“CGT”) if it’s a sole trader or a partnership; or
Corporation Tax if it’s a limited company.
The different reliefs available in this stage are Employee Ownership Trust, Gift Relief, Business Property Relief, Agricultural Property Relief, Entrepreneur’s Relief & Potentially Exempt Transfers.
DISPOSAL
This is the final stage of the lifecycle of a business, which may take place by:
Sale of a business by its owners or sale of the shares by its shareholders to another person;
Sale of all or a proportion of the existing shares with the issue of new shares for subscription; or
Sale or cessation of a business owner by a company + winding up of that company.
The tax charges applicable here are the same ones that were formerly discussed, CGT or CT depending on the form of business. However, there are several reliefs available: Seed Enterprise Investment Scheme, Enterprise Investment Scheme, Venture Capital Trust, Investor Relief, Entrepreneur’s Relief & Enterprise Management Incentive Scheme.
- Author: Irene Correro Garcia
- Author: Irene Correro Garcia
In partnership with:
DISCLAIMER
This article has been written by law students for the sole purpose of providing informative insight. The information in this article is intended for educational purposes only and does not constitute legal advice, nor should the information be used for the purpose of advising clients. You should seek independent legal advice before relying on any of the information provided in this article.
Sources
Service GD, “Capital Gains Tax: What You Pay It on, Rates and Allowances” (GOV.UKApril 8, 2015) <https://www.gov.uk/capital-gains-tax> accessed February 15, 2023
Service GD, “Business Asset Rollover Relief” (GOV.UKOctober 29, 2019) <https://www.gov.uk/business-asset-rollover-relief> accessed February 15, 2023
“HS393 SEED Enterprise Investment Scheme - Income Tax and Capital Gains Tax Reliefs (2020)” (GOV.UK) <https://www.gov.uk/government/publications/seed-enterprise-investment-scheme-income-tax-and-capital-gains-tax-reliefs-hs393-self-assessment-helpsheet/hs393-seed-enterprise-investment-scheme-income-tax-and-capital-gains-tax-reliefs-2020> accessed February 15, 2023
“Apply to Use the Enterprise Investment Scheme to Raise Money for Your Company” (GOV.UK) <https://www.gov.uk/guidance/venture-capital-schemes-apply-for-the-enterprise-investment-scheme> accessed February 15, 2023
Service GD, “Capital Gains Tax: What You Pay It on, Rates and Allowances” (GOV.UKApril 8, 2015) <https://www.gov.uk/capital-gains-tax> accessed February 15, 2023
“Apply to Use the Enterprise Investment Scheme to Raise Money for Your Company” (GOV.UK) <https://www.gov.uk/guidance/venture-capital-schemes-apply-for-the-enterprise-investment-scheme> accessed February 15, 2023
“Tax Relief for Investors Using Venture Capital Schemes” (GOV.UK) <https://www.gov.uk/guidance/venture-capital-schemes-tax-relief-for-investors> accessed February 15, 2023
“HS275 Entrepreneurs' Relief (2020)” (GOV.UK) <https://www.gov.uk/government/publications/entrepreneurs-relief-hs275-self-assessment-helpsheet/hs275-entrepreneurs-relief-2020> accessed February 15, 2023
