Whenever you sell a property, shares or other assets in your personal life, you will probably be subject to Capital Gains Tax (CGT). While you may have experienced this after selling your home or an investment property at a profit, you may not have encountered CGT in your business affairs.
You may be wondering when your business is subject to this tax, or how you can ensure that you remain compliant. We’ve prepared a guide to Capital Gains Tax so you needn’t live in fear of a scary letter from HMRC turning up at your doorstep.
Let’s start at the very beginning...
What is Capital Gains Tax?
Capital Gains Tax is a tax that’s levied on the profits you make from selling something that you own. This can apply to your business assets, but only if you are able to sell them at a profit. If your business has an international reach, it’s important to note you can be liable to pay CGT on assets sold anywhere in the world.
CGT is applied to the sale of tangible assets such as properties, equipment etc. Gains on intangible assets, such as intellectual properties or business reputation, are counted among your trading profits for the financial year.
What is Capital Gains Tax paid on?
Capital Gains Tax is payable whenever you dispose of a tangible business asset. This applies whether the asset is sold in full or in part. You are not taxed on the value of the sale, but on the profit you make from it. Common examples of assets on which businesses must pay CGT include:
Buildings and land
Machinery and plant
Fixtures and fittings
Shares, mutual funds and exchange traded funds
CGT is also payable on assets transferred at below their market value. If you sell your business itself, CGT will also be paid.
How much tax do I need to pay?
The amount of tax you pay on the sale of your business assets may be significantly lower than for the sale of personal or inherited assets. For instance, when selling a domestic property, you pay 18% in CGT on your profits above an annual allowance of £12,300 if you are a basic-rate taxpayer. Higher-rate taxpayers will pay 28%.
However, there is tax relief for businesses known as the Business Asset Disposal Relief (BADR), formerly called Entrepreneurs' Relief. This reduces GCT to a flat rate of 10%. This is subject to a £1 million lifetime allowance.
You do not need to pay CGT on any assets gifted to charitable organisations.
Tips to reduce your Capital Gains Tax bill
Capital Gains Tax needs to be factored into your cash flow projections if you plan to sell assets and believe that you will make a profit from them. But that doesn’t mean you have to sacrifice your margins at the altar of compliance.
Here are some tips to help you reduce your business and personal CGT bill:
Use your annual allowance – it won’t roll over if it goes unused
Take advantage of CGT relief like the Business Asset Disposal Relief
Offset your losses against capital gains. When losses exceed gains, they can be carried forward against future gains
Use your ISA allowance for savings (£20,000)
Take advantage of investor relief, which caps CGT at 10% for higher-rate taxpayers, with a lifetime allowance of £10 million.
We can help
If you’re interested in finding out more about Capital Gains Tax, tax compliance, or any other aspect of your business finances, then get in touch with our financial experts. Find out how GoCardless can help you with Ad hoc payments or recurring payments.