Capital Gains Tax For Businesses: A Detailed Guide

Capital Gains Tax (CGT) is a key consideration for enterprises, especially where assets are sold or transferred. It relates to profit earned upon the sale of assets like property, shares, or intellectual property. Knowing when CGT is relevant, as well as what rates and how to report and pay, is essential to compliance and avoiding unnecessary sanctions.

In this comprehensive guide, we will cover the following important aspects of Capital Gains Tax for businesses: how to calculate your liabilities, what reliefs are available, and what happens if you fail to declare CGT. Whether it is for a small company or a huge enterprise, this guide will help you with the important insights.

What is Capital Gains Tax, and when does it apply?

Capital Gains Tax (CGT) is a tax on your profit when you sell or dispose of an asset. The tax is calculated on the difference between what you paid for the asset, known as the purchase price, and the selling price, less any costs that can be deducted from the selling price, like improvements to make the asset more valuable or fees for the sale.

When an asset is disposed of — when it is sold, gifted, exchanged or otherwise transferred — CGT applies. This covers the sale of a business, its shares, or a property. Certain exemptions and reliefs might apply though, like the sale of your main home or certain fixed assets of a business.

One important consideration is that CGT does not become an issue when you sell an asset at a loss, as there’s no profit to tax. There are exceptions (such as on the sale of your primary residence), but for businesses, CGT is charged on the sale/transfer of business assets (including machinery, goodwill and commercial property).

You only pay tax on the profit you realise when you sell. Individuals who own a business are required to keep track of the purchase, sale, and maintenance costs associated with a company asset.

Who pays Capital Gains Tax?

Capital Gains Tax applies to the following:

• Individuals: If you sell or dispose of an asset and make a profit, you may be required to pay CGT. This includes assets like property, shares, or land.
• Businesses: Companies that sell assets such as commercial property, machinery, or goodwill are liable for CGT on any profit made from the sale.
• Partners in a partnership: If a partnership disposes of an asset, CGT may apply to the individuals involved, depending on how the profits are shared.
• Sole Traders: Sole traders are personally liable for CGT when selling business assets, like equipment or goodwill.
• Trustees: Trustees managing a trust may pay CGT on behalf of the beneficiaries when assets are disposed of.

Exemptions may apply, such as for the sale of a main residence (Private Residence Relief) or specific business assets. Always check whether reliefs or allowances are available to reduce the taxable gain.

What are the Capital Gains Tax rates?

Capital Gains Tax rates depend on several factors, including the type of asset being sold and the individual’s or business’s tax status. Here’s an overview of the main rates:

For Individuals:

• The rate depends on your total taxable income, including the capital gain.
• If your income is below the basic rate tax band, CGT is charged at 10% on any gains (as of 2023/24).
• If your income exceeds the basic rate threshold, the rate increases to 20% for gains.
• Residential property gains (that do not qualify for Private Residence Relief) are taxed at 18% if your total taxable income falls within the basic rate band and 28% if it exceeds the basic rate threshold.

For Businesses:

• Companies pay Corporation Tax on capital gains, which is taxed at the current Corporation Tax rate (19% for smaller businesses, increasing to 25% for larger businesses in 2023).

Entrepreneurs’ Relief (now known as Business Asset Disposal Relief):

• Entrepreneurs selling business assets may be eligible for a reduced rate of 10%, subject to certain conditions and limits, on gains up to £1 million.

Rates may vary depending on your specific circumstances, and it’s important to seek advice for detailed calculations.

How to report and pay Capital Gains Tax

To report and pay Capital Gains Tax, follow these steps:

1. Determine your CGT liability:

• Calculate the total profit (or gain) made from the sale of assets by subtracting the purchase price and any associated costs (e.g., improvements, legal fees) from the selling price.

2. Check if CGT is due:

• Not all sales trigger CGT. For example, you may qualify for exemptions like Private Residence Relief or Business Asset Disposal Relief.

3. Record all relevant details:

• Keep records of the assets sold, including dates, amounts, costs, and any reliefs or exemptions claimed.

4. Include in your Self-Assessment Tax Return:

• Individuals and sole traders must report their capital gains on the Self-Assessment tax return, typically due by 31 January following the end of the tax year (5 April).
• Businesses and trusts must also report their gains through the appropriate tax filings.

5. Pay CGT:

• Once your tax return is processed, HMRC will calculate the CGT owed based on the details provided.
• Pay any CGT owed by the due date, usually 31 January for individuals. You may also need to make payments on account if your tax liability exceeds £1,000.

6. Consider using HMRC’s online tools:

• You can use HMRC’s online services or calculators for accurate reporting and to ensure compliance.

Capital Gains Tax calculator

HMRC provides a Capital Gains Tax Calculator to help individuals and businesses calculate their tax liability on the sale of assets. The calculator is an essential tool for accurately determining how much CGT you owe based on your gains and taxable income.

To use the calculator, you need to input the following information:

1. Sale Price: The amount you received for the asset.
2. Purchase Price: The asset’s original cost, including any associated acquisition costs.
3. Allowable Costs: Any costs associated with the sale, such as improvement costs or legal fees.
4. Reliefs and Exemptions: If you’re eligible for any tax reliefs like Private Residence Relief or Business Asset Disposal Relief, include these details.
5. Taxable Income: Your total income for the tax year, which will help determine the applicable tax rate.

The calculator will then estimate your taxable gain and apply the appropriate CGT rate based on your income level. For businesses, the calculator helps in determining the CGT liability on the sale of business assets, including property and equipment.

You can access the HMRC CGT calculator via the official website. For accurate and comprehensive advice, it’s always recommended to consult with a tax professional, especially when dealing with complex calculations or large transactions.

Capital Gains Tax reliefs

Business Asset Disposal Relief (BADR)

Business Asset Disposal Relief (BADR) allows you to pay only 10% CGT on the first £1 million of qualifying gains over your lifetime. To qualify, you must have been a sole trader or business partner for at least two years and must dispose of business assets such as shares in a personal company or assets used by the business.

Investors’ Relief (IR)

Investors’ Relief offers a 10% CGT rate to external investors who hold shares in unlisted trading companies for at least three years. The shares must have been issued after 17 March 2016, and the individual must not be an employee or officer of the company. The lifetime cap for IR is £10 million.

Business Asset Rollover Relief (BARR)

BARR allows you to defer CGT on gains from selling business assets if you reinvest the proceeds in new or improved assets. The reinvestment must occur within three years of the sale, and the assets must be used in your business. BARR applies to assets like land, buildings, and machinery.

Incorporation Relief

Incorporation Relief allows sole traders or partnership members to transfer their business to a company in exchange for shares without triggering CGT. The gain is deferred until the shares are sold, making it a valuable relief for those incorporating their business.

Gift Hold-Over Relief

Gift Hold-Over Relief defers CGT on the transfer of business assets, including shares, when gifted to others. The recipient assumes the original gain, which is only taxed when they dispose of the assets. This relief is often used for inheritance tax planning.

Are there fines for not declaring Capital Gains Tax?

Yes, failing to declare Capital Gains Tax can result in penalties and fines. HMRC may charge a penalty for late filing or late payment of CGT, which can be a percentage of the tax owed. The penalty increases with the length of delay, ranging from 5% for one month to 100% for more severe cases of non-disclosure or evasion. 

Interest is also charged on overdue amounts. It is crucial to report and pay CGT on time to avoid these penalties. Always consult with a tax professional to ensure compliance with the rules.