Capital gains tax

If you're planning on selling a business, or any asset that is likely to have increased in value, you need to know about capital gains tax. It can get complex though, so consult an accountant if you need more help.

What is capital gains tax?

• If you're selling an asset - such as a business, property, shares or business goodwill (reputation, brand) - any increase in the asset's value since you bought it is called the capital gain.
• And if you're selling an asset that's gained capital (value), you're liable for capital gains tax (CGT).
• CGT doesn't normally apply to:
  • the sale of your home
  • transfers between married couples and civil partners
  • private vehicles (cars, motorbikes)
  • personal goods and effects worth less than £6,000
  • any assets passed over to a charity, museum or gallery are normally CGT-exempt

How much is capital gains tax?

• Capital gains tax is 18% for those earning less than £40,000 and 28% for those earning more than £40,000.
• You work out if you need to pay it by deducting allowable costs from your capital gains. If the resultant total is less than £10,100, you don't owe anything in the tax year 2009/10.
• If you go over the £10,100 threshold, you need to pay capital gains tax.
• You might still have to pay CGT if you're transferring an asset in a non-commercial way or giving it away.  In that instance, the CGT's based on an asset's market value.  Find out more from HMRC.

Relief from capital gains tax on business assets

In some cases, you can avoid paying CGT or reduce the amount you have to pay:

• Entrepreneurs' relief means you only have to pay 10% on the sale of your business up to the first £5m made (the £5m is a lifetime limit, not an annual one).
• Business assets roll-over relief allows you to defer CGT on certain trade assets, as long as you use proceeds to buy specific types of assets for trade purposes.
• Business transfer relief, or incorporation relief, allows you to defer net gains when you transfer your business and all its assets to another company as a going concern (as a whole, with all employee contracts in tact) in return for shares.
• Gifts hold-over relief applies to certain gifts - including assets used for the donor's trade, shares in unlisted trading companies, and agricultural land - seeing as there's no gain until the gift receiver sells the asset.
• Find out more about these reliefs on HMRC's website.

How to pay capital gains tax

 

• You pay through the self-assessment system, so it will just be part of your normal tax return and payments.
• It's calculated by working out the capital gain on each asset separately, then subtracting any allowable losses for each.
• The remaining totals for all your assets are then combined.  That's your net capital gains.
• If your net allowable losses come to more than your net capital gains, you can carry over the surplus loss to offset your CGT in future years.

 

Resources

• HMRC website on capital gains tax.
• Entrepreneur's Relief helpsheet from HMRC (opens a PDF).
• HMRC section on capital gains tax relief for business assets.

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