What you need to know about capital gains tax for small business

What is capital gains tax for small business?

Capital gains tax (CGT) is how HMRC taxes profits from selling business assets. You might have to pay CGT on profits from selling part or all of a business asset. Business assets are also known as capital expenditure.

What is a capital gain?

The capital gain is the difference between the price you paid for an asset and the amount you got from selling it.

Who pays CGT?

CGT for small business applies if:

• You are a self-employed sole trader
• Your business is a partnership

If your trade business is a limited company, then CGT rules don’t apply. Instead, you have to pay corporation tax on any profit you make selling a business asset.

How does CGT work?

You’ll need to calculate the profit you make on selling an asset. You should also see if there are costs related to the asset allowable for reducing its taxable value. You can usually use these costs to reduce the profit you make on selling the asset.

What is the profit on selling the asset?

This is usually the extra amount you get from selling an asset above the price you paid for it.

In certain circumstances, you can use the market value of the asset instead. These include when:

• You sell the asset for less than it is worth
• You inherited the asset and don’t know its original value
• You give the asset away
• You owned the asset before April 1982

Costs you can deduct from profits when you sell an asset

There are certain business costs you can deduct to reduce the taxable value of the capital gain. These include money you spend on:

• Getting the asset valued
• Advertising the asset for sale
• Making improvements to the asset

Costs you can’t usually use to reduce the value of the capital gain include:

• Money spent on repairs and maintenance of an asset
• Other business expenses that you incur and can already claim against your taxable profits
• Any interest on money you have borrowed or loaned to buy the asset

What happens if you make a loss when you sell an asset

If you make a loss when you sell an asset, you can use it to reduce the CGT you have to pay on your taxable gains.

Losses on selling an asset don’t have to be claimed immediately in the tax year when they happen. They can be ‘carried forward’ to future tax years.

What business assets do you pay CGT on?

Business assets on which CGT may be charged include:

• Plant, machinery and equipment
• Business vehicles
• Fixtures and fittings
• Land and buildings
• Shares
• Registered trademarks
• Your business reputation (often called goodwill when a business is sold)

If you buy and sell assets regularly

There’s a type of tax relief available if you buy and sell certain assets regularly. It’s called Business Asset Rollover Relief.

You can apply this tax relief if you buy certain types of new assets within three years of getting rid of the old ones. You also have to use both assets in your business.

What are the CGT rates?

You’ll need to include any CGT that’s due on your tax return as a sole trader or partnership. Various rules apply when you work out whether you owe any CGT in a tax year.

The main CGT rates for a business are:

• 10% if your sole trader or partnership business qualifies for Business Asset Disposal Relief
• 20% on other assets where CGT is due

As an individual taxpayer, you will usually qualify for capital gains tax allowances. These include a tax-free allowance of £6,000 per year.

It’s also worth noting that you don’t usually have to pay CGT on assets you dispose of to your spouse, civil partner or charity. But they might have to pay CGT if they then sell the asset.

How to pay CGT

As a sole trader or partner in a business partnership, you notify HMRC about CGT through your usual annual self-assessment declaration. There are different ways of paying CGT to HMRC.

Capital gains tax on a small business sale

HMRC has rules on how much CGT is due when you sell a business. These apply to sole traders and partnerships.

Business Asset Disposal Relief

This tax relief means you only pay 10% CGT on qualifying profits if you sell some or all of your business.

Gift Hold-Over Relief

Under this tax relief, you pay no CGT if you give away your business. The person you gift it to might have to pay tax when they sell it.

Incorporation Relief

This tax relief is available if you turn your sole trader or partnership business into a limited company.

FAQs

How does capital gains tax for small business work?

If you make a profit when selling a business asset you may have to pay CGT on the profit you make.

Will small business capital gains tax apply to my trade business?

It might do if you are a sole trader or your business is a partnership. It won’t if your trade business is a limited company (which pays corporate tax on capital gains).

What are small business capital gains tax concessions?

Certain CGT reliefs may be available to small business. They include the tax-free allowance of £6,000 on capital gains, as well as Business Asset Disposal Relief.

Is there a CGT retirement exemption?

If you are thinking of selling your business when you retire then you should find out about Business Asset Disposal Relief and Gift Bold-Over Relief.

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