Paying Capital Gains Tax when you sell a business asset

Last updated: 28 Oct 2020

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.

Example 1:

You buy an asset for £15,000
You sell it for £25,000
You pay CGT on the £10,000 profit

Example 2:

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 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 asset is 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 2020/21 tax year is £12,300, or £6,150 for trusts.

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
Vehicles
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

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.

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 asset(s)
20% if you are a higher rate taxpayer in the year in which you dispose of the asset(s)

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 asset.

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 a chargeable asset, you can reduce your overall taxable gains by claiming for the loss in your Self Assessment tax return. The allowable loss will be deducted from the overall gains that you made in that tax 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).

Incorporation Relief

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 that 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 officer or studio space, you will have to pay CGT on that part of the property when it is sold.

Disincorporation relief

If you change your business structure from limited company to 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.