A Guide to Capital Gains Tax for Small Businesses

Ryan Patrick

• 13 min read
A Guide to Capital Gains Tax for Small Businesses

Business owners, especially small business owners have to pay taxes, these taxes include goods and services tax, income tax, corporate tax and capital gain tax. The capital gain tax unlike other taxes, is not taken often.

The capital gain tax is only required when a valuable asset as properties of a company or even shares and investments of a company are disposed of or sold off.

This blog post explains in detail all you need to know about capital gains tax for small businesses.

What is Capital Gain Tax (CGT)

Capital Gain Tax is the tax paid from the gain or profit gotten from selling or disposing of an asset including houses, lands, vehicles and animals and also the gain gotten from selling shares or investments.

The assets could also be art pieces, or any other valuable items sold off. The CGT favours small business owners because the tax is not calculated as other taxes.

The tax is only from the gain or profit of the sales and not the actual capital from the sale. That is, no matter how large the capital for the sale is, the profit will only be calculated from the profit obtained by the small business owner.

For example, if a property was bought for the price of £500,000 and is sold for £600,000, you only pay tax on the extra £100,000 which is the profit obtained from the sale of that particular property or asset.

Also if you sell a valuable asset for less than the price you got it, the Capital Gain Tax will be calculated based on the actual market value of the property or asset at that period. If you buy an asset for £700,000 and you sell it out for £650,000 but the present market value of that particular asset is £600,000, you're to pay a tax on the extra £50,000 since the present market value is lower than the value when you bought it.

Who Should Pay Capital Gains Tax (CGT)

Capital Gains Tax (CGT) is mostly paid by small business owners but other people can also pay capital gains tax. People who can also pay capital gains tax are

  • Private individuals
  • Self-employed persons
  • Sole traders
  • Partners in a business partnership
  • Company owners
  • Company or business trustees
  • Personal representatives of dead or deceased persons

As a limited company, you're not entitled to pay the CGT unlike small company owners, instead, you're entitled to pay corporation tax.

Even as a limited company, if you sell a part of your company, you have to pay capital gains tax from any profit gained from selling a part of the company or any of the company's assets.

As a small business owner, you also have to pay capital gains tax on the profit if you sell a part of your company or an asset of your company.

What Are the Assets That Require CGT

Valuable business assets of businesses increase the value of a company and when sold off, the company or small business have to pay the capital gains tax (CGT). The following are assets that when sold off, a capital gains tax must be paid

  • Landed properties and buildings
  • Vehicles and machineries
  • Fixtures and fittings
  • Plants and livestock or animals
  • Registered company or business trademarks
  • Bonds or shares of companies that are not from an Individual Savings Account (ISA) or a Personal Equity Plan(PEP)
  • Business brand and reputation (Goodwill)

Chargeable assets are assets that can attract a capital gains tax at disposal or sale. The mentioned above are all chargeable assets as they must be a capital gains tax attached to the profit after sales.

All chargeable assets will have a capital gains tax entitled to the profit made from the asset if

  • The asset is sold out for a higher price than it was purchased
  • The asset is sold out for a lower price than it was purchased
  • The asset was given away as a gift and it was transferred to someone else.
  • The asset has been traded for another item or asset
  • Compensation sometimes in the form of insurance payout was received for the asset

How Does Capital Gains Tax(CGT) Work

Capital Gains Tax works differently with different types of companies and different types of persons.

The CGT works to favour entrepreneurs and small business owners in tax calculation and helps them pay tax out of only the gain they get from selling an asset.

CGT in Sole Trader

If you decide to sell a sole trader business or a partnership then you have to pay CGT on the gain gotten from selling the business. The gain gotten from the business may be monetary or in the form of a business asset you got for yourself during the trade.

You will have to calculate the value of the asset you got for yourself and then the tax will be calculated from the present value.

Read this to see some of the advantages and disadvantages of a sole trader.

CGT in Limited Company

If a limited company is sold off or the shares of the company are sold, you have to pay capital gains tax as a shareholder or the personal gain from the capital you got from the sale. The capital gain of the sale can be

  • The money you receive from the sale of the shares you owned
  • An asset of the company that you decide to keep for yourself
  • The profit made from the sale of a business as a whole which includes all trades, assets and all shares combined.

The capital gains tax amount to be paid depends solely on the difference between what you paid when getting the company or shares or the value of the company, share or asset at the time you purchased it and the value of the company, shares or asset at the time you sold them for.

CGT in Shareholders and Directors

As a director or a major shareholder of a company, if you want to sell the entire company or business, instead of selling off or disposing of all the shares, you have to pay corporation tax after the sale of the company as an asset before it is distributed to shareholders.

When selling a business or a company, it is better for a taxpayer to sell it off as a disposal of shares instead of naming it an asset. If you sell it as an asset, the sale will attract both corporation tax and capital gains tax but if you sell it as a disposal of shares, the sale will only attract capital gains tax.

CGT in Small Business Owner

As a small business owner, after you sell a business asset, you have to calculate your profit of gain and determine if it is entitled to a capital tax relief or not. If you're to pay capital gains tax, you have to also calculate how much tax you are to pay.

The Annual Exempt Amount is a tax-free allowance for capital gains tax and you don't have to pay any tax on your gains in a tax year that failed within this period (Annual Exempt Amount)

For the 2023/24 tax year, the tax-free allowance is £6000 and £3000 for trustees. From 6 April, the Annual Exempt Amount is reduced to £3000 and £2500 for most trustees

However, if your overall gain from that sale is above the tax-free amount, your CGT tax will be at the rate of

  1. If you're a basic taxpayer in the year the disposal is taking place, your CGT will be 10%.
  2. If you are a high-rate or additional-rate taxpayer, and the amount of your gain is higher than the basic income tax band, you have to pay 20% CGT.

Your capital gain tax amount as a small business owner usually goes towards the total taxable income you receive. You have to know this when you're working out your tax bracket.

This means that a huge amount of gain from a sale can increase your total annual earnings above the basic rate threshold which is £50,270 for the 2023/24 tax year. If your total income exceeds the basic rate threshold, then you are a higher-rate taxpayer or additional-rate taxpayer.

If the whole or part of your main residential building is for a business and you later dispose of or sell it off. If you make gains from the sale of this property, and you do not meet the criteria for Private Residence Relief, you have to pay a CGT rate of 18% instead of 10% as a basic taxpayer and 28% instead of 20% as a higher rate or additional taxpayer.

CGT in Gifts

If you give out a business asset to a charity organisation, you do not have to pay capital gains tax. But if you sell the property to a charity organisation for more than you paid for it and less than the market value, you have to pay capital gains tax.

Also if you gift or sell a business asset to your spouse or a civil partner, you do not have to pay capital gains tax on the sale of that item unless in certain conditions such as

  • If the both of you are separated and did not live together all through that particular tax year
  • You gave your spouse or civil partner the goods or business assets to sell through their own business

You can also delay your capital gains tax or pay less by claiming several tax reliefs on costs related to the assets you are selling.

Work Out Your Capital Gains

As a small business owner, entrepreneur, sole trader, shareholder, director or a private individual, the gains you get are the difference between the actual price of the asset you paid for or its value when;

  • You first got it and the price you sold it for or the present value of the asset.
  • You must use the market value of an asset to calculate your gains if
  • You decide to give out the asset as a gift to your spouse, legal partner or a charity organisation
  • It is sold for a price than what you bought it for
  • The asset was inherited by you and you do not know the actual tax value of the inherited assets
  • You have owned the asset since before April 1982

If you sell off an asset that was given to you as a gift and you have already claimed Gift Hold-Over Relief, you must pay the actual price of the asset when it was purchased to work out your gain. However, if you bought the article for less than it was worth, you will use the amount you paid for it to calculate your capital gains tax.

You can also request a valuation from HMRC's Shares and Assets Valuations (SAV) team to check your valuation. Before you can request a valuation, you have to complete a 'post-transaction valuation check for capital gains' form after the sales of the asset take place

Calculating your total taxable gains and tax liability for a tax year, you have to add all the gains from every business asset you have sold so far and deduct any allowable losses, costs or tax relief. The total Annual Exempt Amount will be subjected to capital gains tax.

However, if your total gains for the tax year are under your tax-free allowance, you don't have to pay any capital gains tax. But you still have to report your gains to HMRC if the following applies

  1. You are registered for self-assessment
  2. The amount in total of what you sold the asset for is more than four times your capital gains tax allowance

Reducing Capital Gains Tax (CGT)

You can reduce your capital gains tax liability but it depends on the asset and how it was sold. You can reduce your CGT liability by removing some costs, expenses, and losses and claiming tax reliefs from the gain gotten from those sales. In addition to this is your capital gains tax-free allowance for the tax year.

Reducing CGT by Deducting Costs

If you remove some costs or expenses that were incurred when buying, maintaining, improving or selling an asset can all be deducted from the actual amount of gains gotten from the sale. Costs you can remove or deduct from the gains include:

  • Accidental fees such as valuation, advertising, acquisition or disposal fees or costs
  • Improving an asset aside from normal maintenance and repairs
  • Stamp Duty Land Tax and Value Added Tax (VAT), except if you want to reclaim the VAT
  • Costs that cannot be deducted from your gains include
  • An interest is attached to the loan you used to purchase the asset.
  • Any costs or fees that a business expense

If you don't know what cost to deduct and how to deduct these costs, you can contact HMRC for more information about deducting costs.

Reducing CGT by Reporting A Loss

If during the sales of an asset, you encounter a loss, you can also decrease your total taxable gains by claiming for 'allowable losses' in your self-assessment annual tax returns.

You can deduct or remove allowable losses from your overall gain made in that particular tax year and you can also claim losses up to four years after the tax year you sold an asset.

You can deduct losses that were left unused from the previous tax years and carry ahead any available remaining allowable losses to tax years in the future. This helps you to make use of your Annual Exempt Amount every year

Reducing CGT Through Tax Relief

As a small business owner, sole trader, shareholder, director or private individual, you can deduct or delay your capital gains tax on assets belonging to your business if you are eligible for tax relief. Below are some of the tax reliefs that you can be eligible for "Business Asset Disposal Relief (BADR)" (Previously known as Entrepreneurs' Relief)

As an entrepreneur, if you sell off the whole or part of your company, you can pay a 10% capital gains tax on any profit you make on the business assets instead of the normal rates. Business Assets Disposal Relief (BADR) is open to

  • Partners in a business partnership who are self-employed
  • Shareholders in a personal company
  • Trustees who sell assets held in a trust
  • Sole traders

As a sole trader or a partner in a partnership business, you must own the company or business for at least two years from the date on which you are selling the business.

Even if you're selling shares in the company, you must be a shareholder for at least two years from the time you're selling off the shares. The following must apply if you're a shareholder

  • The main business activity of the company is in trading and not a non-trading company like an investment business, or the company is the holding company of a trade group.
  • You are a director, company secretary or employee of that particular company or business or another company or business in the same group as the company you're selling the shares from.
  • The business you're selling the shares from must be a personal or private company for at least two years to the time the shares are being disposed of except the shares are from an Enterprise Management Incentive (EMI).

This means you must have at least 5% of the shares and voting rights of the company. Also, you must be

Entitled to a least 5% of the distributable company profits and the total assets on the dissolution of the company or

You must have at least 5% of the disposal proceeds of the company or disposed of or sold of.

If the shares you hold as a shareholder are less than 5% due to the issuance of more shares by the company, you still have access to the eligibility for relief if you choose to be treated like you sold the shares and purchased another share immediately before the new shares were issued. If you do this, then you can claim the Business Asset Disposal Relief (BADR).

Business Asset Rollover Relief: If you sell off a company or business asset and use the whole or part of the profit to replace the asset or buy another business asset, you can also delay the capital gains tax on the gain of the previous asset till you're able to dispose of or sell the second or new asset.

The new item you bought must be within three years of selling off the previous asset for you to be eligible for this rollover relief.

Disincorporation Relief: If as a limited company, you change the business structure of your company to sole trader or partner in a partnership business and you get the company's business assets, you can claim Disincorporation relief. However, if you sell or dispose of this business asset later in life, you'll be subjected to CGT.

Incorporation Relief: If you have a company or business as a sole trader or business partner and you later decide to change the structure of your company to a limited company, you can claim incorporation Relief if you can transfer all your business assets (excluding assets in the form of cash) to the limited company in exchange for shares in the company, you will be allowed to delay CGT payment on the transferred asset.

Gift Hold-Over Relief: If as a business owner, you decide to dispose of or sell off any business asset(including some types of shares) for a price that is less than what you got it for or a price less than its present value, you do not have to pay capital gains tax.

However, the party receiving the asset will have to pay a capital gains tax when they are disposing of or selling the asset.

Private Residence Relief: You can obtain a private residence relief when you sell or dispose of your main residence as long as that has been your primary residence for a very long time and you own the residence and no part of the building or residence has been used for business purposes.

If you have used or are presently using the whole or part of your residence for business purposes then you must pay capital gains tax.

How to Report and Pay Capital Gains Tax (CGT) With HMRC

All capital gains tax must be reported and paid to HMRC. No bill is sent for CGT instead you have to calculate your tax and report your profits or losses and tax liability.

You can work out and report your gains by either using HMRC's real-time capital gains tax service which is only available to UK residents or you can report your CGT in your self-assessment return.

A particular partner on a partnership business will have to complete a form SA803 on behalf of the partnership business and you will need to calculate your profit and losses yourself. You can choose any of the above ways to report CGT but you must make sure the following information is present

  • The date you bought the asset and the day you disposed of the asset
  • The price you bought the asset for and the price you sold it for
  • Information on the removable losses, allowable losses and tax reliefs
  • Working out of the capital gains and losses you're reporting

Once your report gets to HMRC, you will receive an email or letter from HMRC containing a 14-character CGT payment reference number that normally starts with 'X'. You have to use the number when paying CGT and you must pay through the HMRC online tax payment service.

If you reported your CGT in your self-assessment annual report, then you have to pay your CGT as a part of your Self-assessment tax bill.

Records you Need To Pay Capital Gains Tax

There are some records you need to keep to calculate and report your CGT including bills, invoices, and receipts indicating

  • The amount you paid for the asset
  • Any additional cost relating to the purchase, improvement and disposal of the asset
  • Tax reliefs
  • The amount you got from selling the asset
  • Any contract that is related to the purchase or disposal of the asset
  • Copies of valuations

These records should be kept for at least five years after the self-assessment return has been reported.

Form Your Company with Incorpuk Today

At Incorpuk, we will help you through the company formation process and file your confirmation statements to help your business stay compliant. Whether you're a UK resident or a non-UK resident, our team is ready to provide guidance and help you establish your company in the UK. Contact us here today.

Conclusion

Sole traders, entrepreneurs, small business owners, directors and shareholders of a company have to pay capital gains tax when they dispose off a property or asset. Capital gains tax is calculated from the gain of the sale and not the whole selling cost. Reporting your CGT is very important and all small business owners should ensure to report their capital gains tax. Do you have any questions on capital gain tax, kindly contact one of our Incorpuk's experts for help.