Capital Gains Tax (CGT) is a tax on the profit you make when you sell, give away or exchange your business, assuming it has increased in value since you set it up.
How it works
If you’re selling an asset – such as a business, property, shares or business goodwill – any increase in the asset’s value since you bought it is called the capital gain. It is only the profit or capital gain that is taxed, not the total amount of money you receive from the sale.
You must pay tax on any gains you make in a year, although you are allowed to keep up to a certain amount – known as the Annual Exemption Amount – before the tax kicks in. Capital Gains Tax is also charged on the sale of business assets such as shops, factories, workshops, fixtures and fittings, plant and machinery.
- Capital gains tax is currently charged at different rates for individuals who are in the lower personal income tax bracket, and for individuals in the higher personal income tax bracket.
- However, if you are an entrepreneur who owns all or part of the business you run, you are likely to qualify for Entrepreneurs Relief, in which capital gains tax is charged at just 10% for the first £1 million of gains made. This is a lifetime limit which means you can make claims for Entrepreneurs Relief on more than one occasion until your total gains reach £1 million.
- You must report and pay Capital Gains Tax as part of your usual personal tax return, through the self-assessment system for individual taxpayers. Keep a record of how you worked out how much CGT to pay in case HMRC ask you for more information.
- If you make a loss on an asset that normally attracts Capital Gains Tax, you can in most cases claim for your loss and deduct it from other gains. If your net allowable losses come to more than your net capital gains in any particular year, you can often carry over the surplus loss to offset your CGT in future years.
Things to consider
As well as Entrepreneurs Relief, there are three other types of Capital Gains Tax relief that you may be entitled to:
- Business asset roll-over relief – this allows you to postpone the payment of CGT if you dispose of a business asset which you intend to replace.
- Incorporation relief – this allows you to postpone the payment of CGT if you incorporate your business, in other words, turn your business into a limited company.
- Gifts hold-over relief –if you give away a business asset you may be entitled to postpone all or part of the CGT until the asset is sold or disposed of by the person you gave it to.
- Just to confuse the issue, the rules for each relief are different; some assets may count as business assets for one relief but not for others, and you have to claim some reliefs and you get others automatically if you are entitled. So you should always consult an accountant when selling your business or business assets to make sure you have got the Capital Gains Tax right.
If you use part of your home for your business and pay business rates on that part, then you may have to pay Capital Gains Tax on that proportion of the gain when you sell your house.
David Hathiramani is the co-founder of A Suit That Fits, an online custom menswear company which has a turnover of £3 million. He thinks the Entrepreneurs Relief provision, which allows entrepreneurs to pay just 10% on their first £10 million of capital gains, is a great way of encouraging entrepreneurs to start and grow businesses in the UK. He says: “If this encourages people to start up businesses and do their own thing, then that is good for the country”. – Since this example was added as is updated previously in this article, the entrepreneurs relief limit has dropped to £1 million.