Selling a business can be a complex financial process, especially when it comes to managing capital gains tax. This article presents effective strategies for minimizing tax burdens during business sales. Drawing on insights from tax experts and financial advisors, it offers practical approaches to optimize your financial outcome.

  • Plan Early for Tax-Efficient Business Sale
  • Leverage UK Tax Reliefs for Business Sales
  • Negotiate Equity Sale for Capital Gains Advantage
  • Optimize Asset Allocation for Tax Reduction
  • Structure Payments to Balance Tax and Risk

Plan Early for Tax-Efficient Business Sale

When planning for the tax impact of a business sale, the process starts long before the sale actually closes. Effective tax planning for capital gains requires both proactive structuring and careful post-sale management.

At the pre-sale stage, we focus on strategies such as:

  • Entity Structuring: Ensuring the business is structured in a tax-efficient manner is critical. For example, if the business qualifies for Section 1202 treatment (Qualified Small Business Stock), up to 100% of the gain could be excluded from federal tax.
  • Deal Structuring: Deciding whether the sale will be treated as an asset sale or a stock sale significantly impacts tax outcomes for both buyers and sellers. Each structure has different implications for gain recognition and future deductions.
  • Installment Sales: If the sale proceeds can be spread out over multiple years, installment sale treatment allows the seller to recognize gain over time, potentially staying in lower tax brackets.
  • Residency Planning: State taxes can significantly affect the overall tax burden. In some cases, it makes sense to consider relocating to a state with no or low income taxes before the sale—though timing and substance are critical to ensure compliance.
  • Charitable Planning: Sellers can use strategies like donating a portion of ownership to a donor-advised fund or charitable remainder trust before the sale, securing a fair market value deduction and reducing taxable income.

At the post-sale stage, planning revolves around managing liquidity and tax obligations:

  • Estimated Tax Planning: Careful calculation and timely payment of estimated taxes are essential to avoid underpayment penalties.
  • Capital Loss Harvesting: If there are existing investment losses, they can be strategically harvested to offset the capital gains.
  • Tax-Efficient Reinvestment: Post-sale financial planning also looks at how to redeploy proceeds in a way that minimizes future tax exposure, such as through opportunity zone investments or other tax-advantaged vehicles.

Ultimately, minimizing the tax burden from a business sale requires an integrated approach that considers the seller’s broader financial goals, the structure of the deal, and available federal and state tax strategies. Engaging experienced tax advisors early in the process—often before negotiations begin—is key to maximizing tax efficiency.

Igor TutelmanIgor Tutelman
Managing Partner, Iota Finance

Leverage UK Tax Reliefs for Business Sales

When planning for capital gains tax (CGT) on the sale of a business in the UK, timing and structure are key. Ideally, this planning starts well before the sale, allowing time to explore available reliefs and organise the transaction in the most tax-efficient way. Understanding the ownership structure, business type, and whether it qualifies for any tax reliefs is essential.

One of the most effective strategies is to make use of Business Asset Disposal Relief (formerly Entrepreneurs’ Relief). If eligible, this allows you to pay a reduced CGT rate of 10% on gains up to a lifetime limit (currently £1 million). To qualify, you need to have owned the business for at least two years and been a director, partner, or employee with at least 5% of shares and voting rights in the company.

Transferring shares to a spouse or civil partner who may have unused CGT allowances or be in a lower tax band can reduce overall tax liability. The timing of the sale is also crucial. Spreading gains across multiple tax years helps maximise annual exemptions, with the 2024/25 CGT annual exempt amount being £3,000 for individuals (reduced from £6,000 in 2023/24).

Additional strategies include reviewing pension contributions (to potentially reduce higher rate tax liability), using losses from other investments to offset gains, and considering holdover relief or Employee Ownership Trusts for family businesses. It’s also worth noting that different CGT rates apply depending on income levels, with higher and additional rate taxpayers paying 20% on most assets (except residential property). Always consult with a qualified tax professional early on, especially for significant sales involving complex structures.

Richard McNallyRichard McNally
Tax Preperation Service, Pie – The Self Assessment App

Negotiate Equity Sale for Capital Gains Advantage

Business owners need to be careful when selling their business because they may get an unexpected and unfavorable tax outcome. Long-term capital gain treatment only applies when selling the company’s “equity” (in other words, when you sell ownership of the company). However, buyers generally prefer to purchase the company’s assets rather than its equity.

Buyers prefer to purchase assets to obtain a higher adjusted basis of the business property, which allows them to claim higher depreciation deductions and reduce their post-sale income taxes. The problem for sellers is that when selling assets, they normally incur ordinary income tax rates instead of benefiting from long-term capital gain tax rates.

While sellers generally want to sell equity and buyers generally want to buy assets, a skilled lawyer can negotiate a compromise where each party maximizes their net present value of after-tax cash flows related to the sale. For example, even if the buyer purchases the equity, the parties can escrow a portion of the sale price for a certain period to cover any unforeseen liabilities that may arise after the sale closes. Such a provision, coupled with a slight reduction in the sale price, often persuades the buyer to agree to an equity purchase, allowing the seller to benefit from long-term capital gain treatment.

Whitney SorrellWhitney Sorrell
Attorney, Sorrell Law Firm, PLC

Optimize Asset Allocation for Tax Reduction

When advising clients on tax planning for capital gains from a business sale, we prioritize clarity and strategic structuring. Business sales involve both physical assets (e.g., equipment, real estate) and intangible assets (e.g., goodwill, business entity). By optimizing sale price allocations while complying with IRS rules, favoring capital gains over ordinary income may result in tax reductions.

  • Physical Assets: These are taxed as capital gains (sale price minus adjusted basis). Depreciation recapture may apply, which is taxed as ordinary income (up to 37% federal in 2025) rather than long-term capital gains (20% + 3.8% NIIT).
  • Intangible Assets: The sale of stock or goodwill is typically a long-term capital gain (20% + 3.8% NIIT) if held for over a year. For pass-through entities, gain allocation (e.g., goodwill vs. inventory) affects tax treatment.

Structuring Payments Over Time may be beneficial. Be cautious and understand your potential drawbacks.

Benefits:

  1. Tax Deferral: Capital gains are spread out, potentially lowering annual tax brackets.
  2. Cash Flow: Steady income may align with financial needs.
  3. Rate Changes: Deferral may benefit from future lower tax rates.

Drawbacks:

  1. Interest Income: Taxed as ordinary income, often at higher rates.
  2. Risk: Buyer default complicates tax and recovery issues.
  3. Lost Liquidity: Lump sums allow immediate reinvestment.

For example, a $5M sale with $1M annually over 5 years spreads gains, but risks default and taxes interest.

Staying on as high-wage earners vs. taking a lump sum:

High-Wage Earner:

  • Drawbacks: Wages are ordinary income (up to 37% + 2.9% Medicare). High income may reduce the overall benefit.
  • Benefits: Predictable income and benefits like health insurance.

Upfront Payment:

  • Tax: Capital gains (20% + 3.8% NIIT) may be more tax-efficient.
  • Drawbacks: May trigger NIIT; requires reinvestment planning.
  • Benefits: Liquidity for investments or debt repayment.

For example, $10M sale with $8M upfront (23.8% tax) and $2M wages (40% tax) vs. full $10M upfront (capital gains). Your income needs and goals should be evaluated.

Additional Strategies to Minimize Taxes:

  1. QSBS: Exclude up to $10M in gains under IRC Section 1202.
  2. CRTs: Defer taxes, provide income, and charitable deductions.
  3. 1031 Exchanges: Defer real estate gains.

Tailored tax planning clarifies asset taxation, evaluates payment structures, and compares wage vs. lump-sum options. Working with advanced tax planning experts will help ensure the best possible outcome.

Katie NolesKatie Noles
Mcep, Master Certified Estate Planner, Advisors EP

Structure Payments to Balance Tax and Risk

We approach tax planning for capital gains from the sale of a business with a careful, proactive strategy. Planning early—ideally, well before a sale is on the table—is key to minimizing the tax burden. We begin by reviewing the business’s legal structure, as the tax implications differ significantly between C Corporations, S Corporations, and LLCs. In some cases, converting from a C Corp to an S Corp well in advance of the sale can help avoid double taxation, though this must be timed correctly due to IRS holding period rules. We also help clients assess whether an asset sale or a stock sale offers better tax advantages, depending on their goals and negotiating power.

To reduce capital gains exposure, we often consider installment sales, allowing clients to spread payments over multiple years and avoid being taxed in a higher bracket all at once. If the business qualifies, we explore using the Qualified Small Business Stock (QSBS) exclusion under Section 1202, which can exempt a large portion—or even all—of the gain from federal tax, assuming the stock has been held for five years and other requirements are met. We also help charitably minded clients incorporate giving strategies, such as donating a portion of their business to a charitable remainder trust or donor-advised fund before the sale, which can reduce capital gains and provide income tax deductions.

For large capital gains, reinvesting in a Qualified Opportunity Fund can offer significant tax deferral or reduction. We also explore transferring ownership interests to family members or irrevocable trusts before the sale to shift appreciation to lower tax brackets and reduce estate exposure. Every client’s situation is unique, and we tailor our advice accordingly, working closely with CPAs and financial advisors to ensure a seamless, tax-efficient exit that aligns with the client’s financial and estate planning objectives.

Michael MerharMichael Merhar
Attorney/Owner, Merhar Law