What is Capital Gains Tax?

Capital Gains Tax (CGT) is a tax levied on the profit made when you sell or dispose of an asset that has increased in value. The tax is only charged on the gain, not the entire sale price. For small business owners, understanding CGT is crucial as it can affect the profitability of selling business assets or shares.

What Triggers Capital Gains Tax?

In the UK, Capital Gains Tax is applied when you sell or transfer an asset, such as property (excluding your primary residence), shares, or business assets. You are required to pay tax only on the profit you make, which is the difference between the price you paid for the asset and the amount you sold it for.

Common CGT Scenarios for Small Business Owners

1. Selling a business property: If you sell a commercial property that has appreciated in value, CGT will apply to the gain made.
2. Selling shares: If your business is structured as a limited company, selling shares in your business can trigger a CGT liability.
3. Transferring assets: Even gifting an asset to someone other than your spouse or civil partner can trigger a CGT charge.

Capital Gains Tax Rates

The rate of Capital Gains Tax you will pay depends on your income tax bracket and the type of asset being sold. For the 24/25 tax year, the rates are as follows:

• 10% for basic rate taxpayers on most assets.
• 20% for higher or additional rate taxpayers.
• For property sales, the rates are higher: 18% for basic rate taxpayers and 24-28% for higher or additional rate taxpayers.

Exemptions and Allowances

There are several exemptions and reliefs that can reduce your CGT liability:

• Annual Exemption: For the 24/25 tax year, individuals have a tax-free allowance of £3,000 on capital gains. If your total gain is below this threshold, you won’t owe any CGT.
• Business Asset Disposal Relief (formerly Entrepreneurs’ Relief): Small business owners may qualify for a reduced rate of CGT (10%) on gains from the sale of business assets or shares, provided specific criteria are met.
• Spousal Transfers: Assets transferred between spouses or civil partners are generally exempt from CGT.

Reporting and Paying Capital Gains Tax

You must report any taxable gains to HMRC. For property sales, this must be done within 60 days of completion, while other asset sales can be reported in your annual self-assessment. Paying the tax promptly ensures you avoid penalties and interest charges.

Tips for Small Business Owners

• Plan Ahead: Timing your asset sale carefully can reduce your CGT liability, especially if spreading it over multiple tax years to take advantage of annual allowances.
• Use Reliefs: Make sure to explore all available reliefs, such as Business Asset Disposal Relief, to minimise your tax bill.
• Get Professional Advice: CGT can be complex, and consulting a tax professional ensures you comply with regulations while taking advantage of available tax-saving strategies.

Wrapping It Up 

Capital Gains Tax can have a significant impact on small business owners, especially when selling valuable assets or shares. Being aware of the rules, rates, and available reliefs helps you plan and make informed financial decisions. If you’re planning an asset or share sale, get in touch today to discuss your CGT position.

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