Should I take a dividend before selling my company

For an individual selling shares, a dividend paid just before the sale usually increases the total tax bill: in 2026 to 2027 dividends above the £500 allowance are taxed at up to 39.35%, while a gain on the shares is taxed at 18% where Business Asset Disposal Relief applies and at no more than 24% where it does not. The answer often reverses when the seller is a company, because most dividends received by companies are exempt. HMRC’s transactions in securities rules are aimed at the opposite move, taking a company’s reserves out as capital, so the real risk sits with sales to connected buyers.

What does a pre sale dividend actually change?

A buyer of shares buys everything the company owns, including its cash. Surplus cash can either stay in the company, with the seller receiving a higher price, or be paid out as a dividend before completion, with the buyer paying correspondingly less.

The seller ends up with roughly the same money either way; what changes is the label. Cash paid for through the share price is capital and taxed as a gain. Cash paid out first is income and taxed as a dividend. The choice is mainly a comparison of tax rates, though it also affects completion accounts and the locked box date.

Whatever the tax result, the dividend has to be lawful. Section 830 of the Companies Act 2006 says a company may only make a distribution out of profits available for the purpose, meaning accumulated realised profits less accumulated realised losses. The board should check the reserves position on the date of payment, not just the last year end figures. Our page on paying dividends legally covers the paperwork.

How is an individual seller taxed on each route?

For the 2026 to 2027 tax year the rates are as follows.

Route	Basic rate band	Higher rate band	Additional rate band
Dividend above the £500 allowance	10.75%	35.75%	39.35%
Gain on shares, no relief	18%	24%	24%
Gain qualifying for Business Asset Disposal Relief	18%	18%	18%

Business Asset Disposal Relief applies at 18% on qualifying disposals from 6 April 2026, up to a lifetime limit of £1 million of gains. For shares, the company must be a trading company or the holding company of a trading group, and for at least two years up to the sale the seller must be an officer or employee and hold at least 5% of the shares and voting rights, plus a 5% economic interest. The annual exempt amount for gains is £3,000. See our pages on Business Asset Disposal Relief and dividend tax rates for the detail.

A higher or additional rate seller therefore pays more on every pound taken as a dividend than through the price, with or without the relief.

How might the numbers look?

Illustration only. Priya owns all the shares in a trading company she set up years ago for a nominal sum. A buyer will pay £900,000 for the company including £200,000 of surplus cash. She qualifies for Business Asset Disposal Relief, has not used any of her lifetime limit, and her salary and other income already take her taxable income above £125,140, so any dividend falls in the additional rate band.

• No dividend. She sells for £900,000. Her gain after the £3,000 annual exempt amount is £897,000, taxed at 18%: £161,460.
• Pre sale dividend. The company pays her a £200,000 dividend and she sells for £700,000. Dividend tax is (£200,000 less £500) at 39.35%, which is £78,503. The gain after the annual exempt amount is £697,000 at 18%, which is £125,460. Total: £203,963.

The dividend route costs her about £42,500 more. The figures ignore costs and deferred consideration, but the direction of the result is typical.

When can a pre sale dividend help an individual?

The comparison only favours a dividend where the dividend rate is lower than the gains rate. On the 2026 to 2027 figures that happens within the basic rate band, where dividends are taxed at 10.75% against 18% on gains. A seller with little other income in the year of sale, or family shareholders with unused basic rate bands, might take a modest dividend within that band and the rest as capital. The £500 dividend allowance is also worth using if it would otherwise be wasted.

What if the seller is a company?

The analysis changes completely where a holding company is selling a subsidiary. Under section 931A of the Corporation Tax Act 2009, Corporation Tax on income applies to a distribution received by a company only if it is not exempt, and most dividends between UK companies fall within the exempt classes. A pre sale dividend from the subsidiary to its parent is therefore usually tax free, while a gain on the shares would be charged to Corporation Tax at up to 25% for profits above £250,000.

If the substantial shareholding exemption applies, the gain is not a chargeable gain anyway under Schedule 7AC to the Taxation of Chargeable Gains Act 1992, and the dividend makes little tax difference. Where the exemption does not apply, paying out reserves as an exempt dividend before the sale reduces the taxable gain. See dividends received by companies for the exemption rules.

The anti avoidance rule here is section 31 of the 1992 Act, which increases the disposal consideration where arrangements materially reduce the value of shares, a main purpose is to obtain a tax advantage, and the arrangements do not consist solely of the making of an exempt distribution. HMRC’s guidance at CG48540 says this means section 31 cannot apply to a straightforward pre sale dividend strip, and example 5 at CG48560 treats paying surplus cash up to the parent before sale as outside the rule. The rule is aimed at extra steps, such as subscribing for new shares to raise base cost and then reducing capital and paying the amount back as a dividend (example 1 at CG48560). Where the target borrows to fund the dividend, HMRC says paying existing distributable reserves before a sale is normal commercial practice but the purpose test must still be considered (example 6).

Does it matter whether the buyer is a company?

For an individual seller, the buyer’s identity is what decides whether the transactions in securities rules in Chapter 1 of Part 13 of the Income Tax Act 2007 are in point. Section 685 covers a seller who receives consideration representing a close company’s distributable reserves without paying income tax on it, or where two or more close companies are involved. Selling shares to a company for cash funded by the target’s reserves can fit that description.

Section 686 excludes cases where there is a fundamental change of ownership: after the transaction the original shareholders and their associates together hold no more than 25% of the ordinary share capital, no more than 25% of the distribution rights and no more than 25% of the votes. A sale of the whole company to an unconnected trade buyer meets that test, and HMRC’s example at CTM36850 of a sale to an unconnected company for cash and a 5% stake says the exclusion is likely to apply.

The exclusion fails where the seller, family or other associates keep more than 25%, for example by rolling a large stake into the buying company, or where the buyer is a new company owned by the same people. CTM36851 gives the example of a spouse forming a new company to buy out the other spouse for cash or loan notes and says clearance is unlikely where the consideration represents distributable assets. For more on the conditions see our page on transactions in securities and on management buyouts.

When may HMRC challenge, and how does clearance work?

Section 684 applies only where a main purpose of the transaction is to obtain an income tax advantage and an advantage is obtained. Section 687 measures the advantage by comparing the income tax that would have been payable had the consideration been a distribution with any capital gains tax actually paid, and CTM36815 limits it to what could have been distributed at the time, including subsidiaries’ reserves.

A genuine pre sale dividend is therefore not the target, because it is taxed as income. The exposure arises when a seller skips the dividend and takes the reserves as capital through a sale to a connected company.

Sellers can apply for advance clearance under section 701 of the 2007 Act. Corporate sellers face equivalent Corporation Tax rules in Part 15 of the Corporation Tax Act 2010, with clearance under section 748. HMRC’s clearance guidance asks for a step by step description, reasons, shareholdings before and after, the latest accounts and the form of consideration, and may ask why current distributable reserves differ from the accounts. HMRC replies within 30 days.

What mistakes come up most often?

• Assuming a dividend is cheaper because it avoids the gain, without comparing a 35.75% or 39.35% dividend rate with an 18% or 24% gains rate.
• Paying a dividend that exceeds the profits available for distribution on the payment date.
• Forgetting that a corporate seller’s position is the reverse of an individual’s, and not checking whether the substantial shareholding exemption already covers the gain.
• Adding extra steps, such as share subscriptions, capital reductions or intra group loans, to a corporate pre sale dividend without considering section 31.
• Selling to a company controlled by the seller’s family, or keeping more than 25% in the buyer, and assuming the fundamental change of ownership exclusion still applies.

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Related Accountapedia entries

• Selling a company: share sale or asset sale
• Dividends paid from pre acquisition profits
• Warranties and indemnities when selling a company
• Transferring client data when selling a practice
• Pre owned assets tax

Sources

• GOV.UK: Tax on dividends
• GOV.UK: Rates
• GOV.UK: Business asset disposal relief
• GOV.UK: How to claim
• GOV.UK: Income tax rates
• legislation.gov.uk: Act 2006 c. 46, section 830
• legislation.gov.uk: Act 2009 c. 4, section 931A
• GOV.UK: Rates and allowances corporation tax
• legislation.gov.uk: Act 1992 c. 12, schedule 7AC
• legislation.gov.uk: Act 1992 c. 12, section 31

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.