What Is Capital Gains Tax?
You pay Capital Gains Tax when selling an asset such as property, equipment or shares.
Capital Gains Tax operates at a much lower rate than Income Tax, and it only applies to the profit you make, not the entire amount received. This creates the opportunity for business owners to make massive savings.
In this guide, we’ll explain how Capital Gain Tax works, who is eligible, and how you can make even more savings.
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How Is Capital Gains Tax Calculated?
Capital Gains Tax is charged whenever you dispose of an asset and make a profit (or ‘gain’).
It is only applied to the profit made, not the entire amount received. This means that if you bought an asset for £10,000 and then sold it for £15,000, only the £5,000 profit would be taxed.
Generally, the tax applies to business owners selling their company assets, but it can apply to some other personal sales, too:
- Property
- Land
- Company shares
- Equipment and machinery
- Registered trademarks
You start paying the tax once your profit exceeds your tax-free allowance (the Annual Exempt Amount.)
How Can I Qualify for Capital Gains Tax?
If you’re a business owner looking to realise company assets, you want to make sure you’re getting as much money back as possible.
You could just sell your assets without any preparation, but this will usually result in paying nearly half of what you earn in Income Tax.
To avoid this, you’ll need to pursue what’s known as a Members’ Voluntary Liquidation. This is a tax-saving exercise that allows directors and shareholders to receive the highest possible return on company assets.
Control of the company is handed over to a liquidator, who will sell its assets and divide the returns among the business’s members. These returns are subject to Capital Gains Tax, not Income Tax.
Entering an MVL is the only way for businesses (with assets worth £25,000 or more) to qualify for Capital Gains Tax. Inactive businesses with little assets can consider pursuing a voluntary strike-off instead, but any returns over £25,000 will be treated as income.
If you’re looking to close a business with assets, it’s more cost-effective to pursue an MVL.
Can I Reduce the Rate of Capital Gains Tax?
While entering an MVL already elicits impressive savings, you can take this a step further by applying for Business Asset Disposal Relief, formerly known as Entrepreneur’s Relief.
BADR is a type of tax relief that reduces the rate of Capital Gains Tax.
To qualify, you’ll need to be one of the following:
- Owner of the business
- Sole trader
- Business Partner
- Director
- Employee
Additionally, you must have been working directly within the company for the past 2 years and hold at least a 5% share. Shareholders not directly employed by the company can’t claim BADR.
You can claim up to £1,000,000 in Business Asset Disposal Relief in your lifetime.
Remember, you won’t automatically receive the relief. You’ll need to claim it via your self-assessment tax return within one year of receiving the returns.
Speak to an Expert
If you’re looking to sell your company’s assets and make a healthy return, speak to one of our insolvency practitioners.
Our expert team can guide you through the solvent liquidation process, allowing you to move on to your next venture with the highest possible gains.
Get in touch today to book a free, no-obligation consultation.
