A Guide to Capital Gains Tax for Small Businesses

A Guide to Capital Gains Tax for Small Businesses

Capital Gains Tax (CGT) is a tax on the profit made when you dispose of an asset that has increased in value. So, if you sell, gift or swap an asset and profit from it, you may have to pay CGT on the gain.

CGT can apply if you’re a self-employed sole trader or in a business partnership; other organisations, such as limited companies, pay Corporation Tax on profits made from selling assets rather than CGT.

What assets might I need to pay CGT on?

Common business assets that may be eligible for Capital Gains Tax include land and buildings, fixtures and fittings, plants and machinery, shares, registered trademarks and your business itself.

How do I work out how much I need to pay?

There are two different rates of CGT – one for property and one for other assets – so how much you pay will depend on the asset you’re selling and the tax band you’re in. A basic rate taxpayer will currently pay 10% on assets and 18% on property; a higher or additional rate taxpayer will be charged 20% on assets and 28% on property.

The capital gains tax allowance in 2021-22 is £12,300, so you can make this amount of profit from an asset before any tax is payable.

It should also be noted that you do not normally pay Capital Gains Tax on gifts to your spouse or a charity.

To work out how much you owe, deduct the amount you paid for the asset from what you sold it for. You can also deduct certain costs from your profit, such as:  

  • valuation fees
  • cost of advertising the assets
  • money spent on improving the asset, although this doesn’t include normal repairs,
  • Stamp Duty Land Tax and VAT unless you can reclaim the VAT

However, you can’t deduct interest on any loan used to buy the asset or any costs you can claim as business expenses.

If you’ve sold multiple assets, it’s a case of adding together the gains from each, and if it’s more than the tax-free allowance, you’ll need to report and pay Capital Gains Tax. Note that if the amount is less than your allowance, you’ll still need to report the gains in your tax return if the total amount you sold the assets for was more than four times your allowance and you’re registered for self-assessment.

Also, if you’ve sold both property and other assets, it’s sensible to use your tax-free allowance against the gains from property, as these would be charged at the highest rate.

If you’re in a business partnership, you’ll need to work out your share of each gain or loss, and your partner must fill in form SA803

How can I reduce my CGT liability?

Before you pay your CGT, however, it’s worth checking if there is any tax relief available to reduce or delay your payments.

Top of the list is Business Asset Disposal Relief (formerly Entrepreneurs’ Relief). If you qualify for this, you’ll only pay 10% on the first £1 million of gains, even if you’re a higher or additional rate taxpayer. Any gains above £1 million are charged at your usual rate.

You can claim Business Asset Disposal Relief if you’re a sole trader or partner selling all or part of your business or its assets that you’ve owned for at least two years. If you’re closing your business rather than selling it, you must dispose of your business assets within three years to qualify for relief.

It should be noted that this relief doesn’t apply to properties, so it wouldn’t apply to landlords selling their portfolios.

Another option to look into would be Business Asset Rollover Relief, which allows you to delay paying Capital Gains Tax when you sell or dispose of some types of assets if you use some or all of the proceeds to replace them. In this scenario, you would only have to pay CGT when you then sell the new asset. You may then need to pay tax on the gain from the original asset.

To be eligible for Business Asset Rollover Relief, you must buy the new asset within three years of selling or disposing of the old one (or up to one year before); your business must be trading when you sell the old asset and when you buy the new one, and you must use both the old and new assets in your business. You can claim relief within four years of the end of the tax year when you bought the new asset or sold the old one if that happened later. Eligible assets include land and buildings and fixed plant or machinery. 

Another way to potentially delay paying CGT as a sole trader or business partnership is through Incorporation Relief, whereby you transfer the business and all its assets (except cash) in return for shares in the company. With Incorporation Relief, you will not pay any tax until you sell those shares.

If you’re eligible for Incorporation Relief, you’ll get the relief automatically; you don’t need to claim.

Finally, you could avoid CGT entirely if you give the asset away or sell it for less than it’s worth. Instead, the person you gifted it to will pay tax when they sell it. Known as Gift Hold-Over Relief, this is open to sole traders or business partners or those who have at least 5% of voting rights in a company, and you must use the assets in your business or personal company.

It is also possible to give away shares in this manner, so long as the company is not listed on any recognised stock exchange; it’s your personal company and provides goods and services rather than non-trading activities.

What if I make a loss?

You also need to report any losses on relevant assets to HMRC as this will reduce your gain and, therefore, the amount of tax you’ll need to pay.

If your total taxable gain is still above the tax-free allowance of £12,300, you can deduct unused losses from previous tax years. If they reduce your gain to the tax-free allowance, you can carry forward the remaining losses to a future tax year.

You can claim for losses via your tax return up to four years after the end of the tax year in which you sold the asset.

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