Guide to Capital Gains Tax for businesses

When you sell an asset you may need to pay tax. As an individual this tax is called Capital Gains Tax (CGT).

What is Capital Gains Tax for business?

CGT is the UK taxation that applies to the gain you make when you are selling assets. Self-employed individuals and people in partnerships pay Capital Gains Tax which is at different rates to income tax. Limited companies have gains but pay corporation tax.

There are many common assets that can be subject to Capital Gains Tax when they are disposed of such as shares, bonds and property. Selling a business, either a sole trader, partnership or shares in a company, could be subject to CGT.

When do you pay Capital Gains Tax?

You pay CGT when you sell an asset and make a gain. The gain is calculated by taking the proceeds from the sale of the asset and deducting the cost of purchase. You can also deduct any costs associated with the sale and purchase such as legal fees.

In addition there is a tax-free allowance, for 2024/25 this is £3,000, which is similar to the personal allowance for income tax.

Not all assets are subject to CGT and there are reliefs that may remove, postpone or minimise the tax charge.

For disposals between 6th April 2024 and 29th October 2024, you will pay CGT at 10% on your gains (or 18% on residential property) if you are in the basic income tax band and 20% on your gains (or 24% on residential property) if you are a higher or additional rate taxpayer.

For disposals from 30th October 2024, you will pay CGT at 18% on your gains if you are in the basic income tax band and 24% on your gains if you are a higher or additional rate taxpayer.

CGT rates for carried interest are 18% for basic rate taxpayers and 28% for higher rate taxpayers, with rates increasing to 32% from 6th April 2025.

Do you pay Capital Gains Tax on goodwill?

The sale of goodwill is treated as an asset and so subject to CGT. There are specific rules around the sale of goodwill to a related company, for example on incorporating your business. It is important that you get advice if you are considering a sale.

How is Capital Gains Tax calculated?

The rules for calculating your gain (profit on sale of the asset) are complex. There are many reliefs and exemptions which may lead to significant savings if claimed. Proper planning is essential when disposing of assets to make sure you minimise your CGT liability.

Indexation allowance

When you sell an asset you may also get a deduction from the gain for indexation allowance. This is a figure that you multiply your cost by to factor inflation into your calculation. You must have owned the asset before December 2017 and can find the multiplier at HMRC’s Indexation Allowance December 2017 guide.

Capital losses

When you sell an asset you may make a loss. It is important to calculate the loss on the sale of any assets to ensure that you offset that loss against any profits in the same year. If you have made a loss overall then you will want to ensure that this loss is recorded to carry forward against any gains you make in future years.

You will still need to notify HMRC of any sale of assets if the proceeds are four times the tax-free allowance and you are registered for self-assessment but it is worth doing this anyway if you make a loss and expect to make gains in the future.

Calculating Capital Gains Tax on a business sale

As with any other assets, the basics are the same for selling a business; proceeds of the sale less the cost of the purchase and any associated expenses. These basic principles apply whether you are selling a business as a sole trader, partnership or holding shares in a limited company.

However, in many cases identifying the different elements of this can be complex and very few sales are straight forward. Selling your business may include deferred consideration, contingent elements or consideration in a form other than cash. Also if you sell or gift at an undervalue there may be implications of doing this.

There are also reliefs you can claim that could minimise your CGT liability. These include Business Asset Disposal relief, roll-over relief or hold-over relief which may be available but have specific rules and criteria you need to be aware of. In some cases it may be possible to structure the sale in a way that minimises overall tax liabilities.

How to reduce Capital Gains Tax when selling a business

It is always important to plan any business sale in advance to ensure that you take advantage of the relief available and structure the sale in the most tax efficient way. In addition to this you will also want to ensure that you are able to maximise its likely sale value. Getting advice early will be essential in achieving this.

TaxAssist can help you with your Capital Gains Tax

If you are considering selling an asset or all or part of your business, we can advise you of the tax planning opportunities available to you before you make your disposal to mitigate or reduce potential tax liabilities. Call us on 01430 411 400 or use our online enquiry form.

Last updated: 31st October 2024