Capital Gains Tax (CGT) is a tax on profit (‘gains’) made on the disposal of chargeable assets such as property, company shares, works of art, and business assets. CGT only applies to individuals (including sole traders and partnerships), trustees, and personal representatives of deceased persons. Below, we explain when and how to pay Capital Gains Tax when you sell a business asset.
Please note that limited companies are not subject to CGT. Instead, they pay Corporation Tax on any profit generated from the sale of their business assets.
When does Capital Gains Tax apply?
You may have to pay Capital Gains Tax if you sell (or ‘dispose of’) an asset for more than the price you paid for it. CGT may also apply if you give away an asset or sell it for less than it is worth. This is because CGT is based on the market value of an asset at the time of its disposal, not the amount of money (if any) that you sell it for.
- You buy an asset for £15,000
- You sell it for £25,000
- You pay CGT on the £10,000 profit
- You buy a property for £200,000
- You sell it to your child for £50,000
- At the time of selling the property to your child, it has a market value of £300,000
- For CGT purposes, you have made a ‘gain’ of £100,000
- You pay CGT on £100,000
Capital Gains Tax does not usually apply to assets that are given to charity, nor on transfers of assets between spouses or civil partners. This is because no gain or loss is deemed to take place. CGT would only apply if the couple is separated and not living together in that tax year, or when the assets are later sold.
You do not have to pay CGT on any gains in a tax year that are within your Annual Exempt Amount (Capital Gains tax-free allowance). The tax-free allowance for CGT for the 2023/24 tax year is £6,000 for individuals and personal representatives, and £3,000 for trusts.
From 6 April 2024, the allowance will reduce to £3,000 for individuals and personal representatives, and £1,500 for most trustees.
What does it mean to ‘dispose’ of an asset?
For the purpose of Capital Gains Tax, disposing of an asset includes:
- selling it to someone else
- transferring it to someone else or giving it to someone as a gift
- swapping it for a different asset
- receiving compensation for the asset, such as an insurance payout
Business assets subject to Capital Gains Tax
Business assets are tangible and intangible possessions owned by a business. The types of business assets that may be subject to CGT upon their disposal include:
- Property, including land and buildings
- Any part of a private residence used exclusively for business purposes
- Fixtures and fittings, such as furnishings, computers, and equipment
- Plant and machinery
- Company shares or bonds that are not in an Individual Savings Account (ISA) or Personal Equity Plan (PEP)
- Registered trade marks
- Goodwill, such as a good business reputation
These business possessions are referred to as ‘chargeable assets’.
How much Capital Gains Tax do businesses pay?
You will not pay Capital Gains Tax on any gains below the tax-free Annual Exempt Amount, nor will you have to pay CGT on any business assets that you give as gifts to charity or to your spouse or civil partner, unless:
- you are separated and didn’t live together at all in that particular tax year, or
- you gave them the goods to sell on through their own business
Overall gains above the tax-free amount will be charged at a CGT rate of:
- 10% if you are a basic-rate taxpayer in the year in which you dispose of the assets
- 20% on any amount above the basic Income Tax rate if you are a higher-rate taxpayer in the year in which you dispose of the assets
If you make gains from the disposal of your main residential property and do not meet the criteria for Private Residence Relief (for example, part of the property is used exclusively by your business), Capital Gains Tax rates of 18% (basic-rate taxpayer) and 28% (higher-rate taxpayer) will apply.
You might be able to delay or pay less Capital Gains Tax by claiming other reliefs, allowances, and costs related to the assets.
Working out your gain
When you sell or dispose of a business asset, the gain that is subject to Capital Gains Tax is normally the difference between the price that you paid for the asset and the price that you sell it for.
However, you must use the market value of the asset to work out the gain if you:
- give it away to someone, other than your spouse or civil partner or to a charity
- sell it for less than it is worth
- inherited the asset and do not know the Inheritance Tax value
- have owned it since before April 1982
If you are selling or disposing of an asset that was given to you and you claimed Gift Hold-Over Relief, you must use the original purchase price of that asset to calculate your gain. Alternatively, if you bought the asset for less than it was worth, you must use the amount that you paid for it.
Capital Gains Tax allowances and reliefs
Depending on the asset, it may be possible to reduce Capital Gains Tax by claiming reliefs and offsetting any losses and expenses incurred as a result of acquiring, improving, and disposing of a business asset.
Costs that you can deduct include:
- incidental fees such as acquisition, valuation, advertising, or disposal costs
- improving an asset (with the exception of normal maintenance and repairs)
- Stamp Duty Land Tax and Value Added Tax (VAT), unless you are reclaiming the VAT
Costs that you cannot deduct include:
- interest on a loan that was used to buy the asset
- any costs that can be claimed as business expenses
If your business makes a loss on any chargeable assets that it disposes of, you can reduce your overall taxable gains by claiming for such ‘allowable losses’ in your Self Assessment tax return.
You can deduct allowable losses from the overall gains that you made in the same tax year. However, you can claim losses up to four years after the end of the tax year in which you disposed of the assets.
This means that you can deduct unused losses from previous tax years and carry forward any remaining allowable losses to future tax years, enabling you to make full use of your Annual Exempt Amount each year.
Businesses can also reduce or delay their Capital Gains Tax liabilities if they are eligible for tax relief, such as:
Business Asset Disposal Relief (formerly Entrepreneurs’ Relief)
If you sell all or part of your business, you may be able to pay 10% Capital Gains Tax on profits on qualifying assets, instead of paying the normal rates. Business Asset Disposal Relief is available to:
- sole traders
- business partners, including LLP members
- individuals with shares in a ‘personal company’
- trustees selling assets held in a trust
To qualify for Business Asset Disposal Relief as a sole trader or business partner, you must have owned the business for a minimum of two years.
Business Asset Rollover Relief
If you dispose of a business asset and use all or part of the gains to replace it or buy other business assets, you can delay paying the CGT that you owe until you dispose of the new asset(s). To be eligible for Business Asset Rollover Relief, the new asset(s) must be purchased within 3 years of disposing of the old asset(s).
If you operate as a sole trader or business partnership and you decide to set up a limited company, you may be able to claim Incorporation Relief if you transfer your business assets (excluding cash) to the company in exchange for shares in that company. This would allow you to delay paying CGT on those assets.
Gift Hold-Over Relief
If you give away business assets (including some types of shares) or dispose of them for less than they are worth, you will not pay any Capital Gains Tax on them. Instead, the recipient of the assets will be subject to CGT if they later dispose of those assets.
Private Residence Relief
Private Residence Relief automatically applies if you sell or dispose of your primary residence, as long as it has been your main home for the entire duration of ownership and no part of it is used solely for business purposes.
However, if any part of your home is used exclusively for business purposes, such as a home office or studio space, you will have to pay CGT on that part of the property when it is sold.
If you change your business structure from a limited company to a sole trader or partnership and acquire the company’s business assets, it may be possible to claim Disincorporation Relief. However, CGT may apply if you later dispose of these assets.
Reporting and Paying Capital Gains Tax
In the UK, Capital Gains Tax must be reported and paid to HMRC. You can do this in one of two ways:
- immediately, using HMRC’s ‘real time’ Capital Gains Tax service (UK residents only)
- after the end of the tax year, through Self Assessment
Whichever way you choose to report and pay Capital Gains Tax, you must ensure that you have:
- the dates on which you took ownership and disposed of the asset
- calculations for each capital gain or loss that you are reporting
- records of the costs and proceeds relating to the disposal of each asset
- any additional details that are relevant, such as tax reliefs and allowances
The records you must keep to work out your gains and report your CGT liability include bills, invoices, and receipts showing:
- how much you paid for the asset
- additional costs related to buying, improving, or disposing of the asset
- tax reliefs
- how much you received for the asset
- contracts relating to the purchase or sale of the asset
- copies of valuations
Businesses must keep these records for at least 5 years after the Self Assessment deadline.
Thanks for reading
Whether you run your business as a sole trader or partnership, there may come a time when you have to report and pay Capital Gains Tax on the disposal of business assets. The rules and regulations are rather complex, so we would recommend using an accountant.
If you have any questions about this post, please leave a comment below. For more small business news and advice, visit the 1st Formations Blog.