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What is a Capital Gain?

Effective cash flow management is crucial to the survival of SMEs, especially in the current highly competitive climate. As well as maximising revenues by boosting sales, businesses need to find ways to reduce costs. Of course, this includes finding ways to reduce operational spending. But it also means finding ways to reduce tax liability while staying on the right side of compliance. 

Unfortunately, small businesses in the UK are 56% more likely to overpay on their taxes due to reporting errors. As such, they owe it to themselves (and their margins) to learn a little about the nuances of tax. This includes differentiating between capital gains and revenue from sales. 

While both are classed as income, they have very different tax implications.  

What is classed as a capital gain?

A capital gain is the money made by a business whenever it sells or disposes of a business asset. The asset may be sold in whole or in part. If the business makes a profit from disposing of the asset, this is classed as a capital gain and is therefore subject to capital gains tax. However, businesses do not have to pay capital gains tax on the full sum received, just the profits they have made on the sale. 

These business assets may include:

  • Property, buildings or land

  • Fixtures and fittings

  • Plant and machinery used in your daily operations

  • Shares in your business

As well as physical assets, intangible assets can also be classified as capital gains, and are therefore subject to capital gains tax. These may include registered trademarks / intellectual property or even your business’ reputation (goodwill). 

How to work out your capital gain

Knowing how to work out your capital gain after selling an asset can help to ensure that you are correctly taxed on this income. 

Your gain is basically the difference between the value of your asset when you bought it and the value of your asset when you sold it. If you gave the asset away, inherited it, deliberately sold it for less than it was worth in order to help the buyer, you should use the market value instead.

Next, deduct any costs incurred in selling or improving the asset, as well as any costs incurred in buying it. While this does not include interest paid on loans to acquire the asset or costs already claimed as business expenses, it may include:

  • Valuation or advertising fees

  • Costs incurred in improving the asset for sale (not normal repairs)

  • Stamp duty land tax

  • VAT that cannot be reclaimed

You should next apply any tax reliefs that are relevant. Click here to see which you can claim. 

What if I make a loss when selling an asset?

If you sell the asset at a loss, you will not have to pay capital gains tax on the sale. These “allowable losses” should still be reported to HMRC and may even help to reduce your total taxable gains. 

Do I need to pay capital gains tax?

Limited companies do not need to pay capital gains tax on profits gained from selling their assets. Instead, they pay corporation tax at the usual rate on these profits. However, sole traders and business partners pay capital gains tax. Rates can range from 18% to 28% depending on the type of asset sold and the company’s income in the year when it was sold.   

We Can Help

If you’re interested in finding out more about capital gains and tax liabilities, then get in touch with our financial experts. Discover how GoCardless can help you with ad hoc payments or recurring payments.

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