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.
Capital Gains Tax is charged at a rate of 20%, less than half of the maximum Income Tax rate of 45%.
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), which is currently set at £3,000.
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 halves the rate of Capital Gains Tax from 20% down to just 10%.
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.
FAQs
What Are the Different Capital Gains Tax Rates?
For business owners, you will more than likely pay Capital Gains Tax at a rate of 20%.
However, there are some different brackets and rates:
- Basic rate taxpayers: 10-18%
- Higher rate taxpayers: 20%
- Residential property gains: 24%
No matter which bracket you fall under, Capital Gains Tax is much cheaper than regular Income Tax.
Has There Been an Increase in Capital Gains Tax?
There have been no increases in Capital Gains Tax – in fact, the government recently reduced the higher rate charged on residential property gains from 28% to 24%.
Capital Gains Tax rates are set at 20%, compared to the maximum Income tax rate of 45%.
Instead, the annual exemption amount for Capital Gains Tax has decreased. Previously, the annual exemption was set at £12,600; this fell to £6000 on 6 April 2023 and fell again to £3000 on 6 April 2024.
What is the 36-month rule of Capital Gains Tax?
This rule establishes that selling or transferring a property within 36 months of its acquisition may trigger Capital Gains Tax liabilities. This means you may have to pay CGT if you sell one of your commercial properties, even if you aren’t pursuing a Members’ Voluntary Liquidation.
Do You Have to Pay Capital Gains Tax on Foreign Property?
If you’re a UK resident, you are obliged to pay Capital Gains Tax on the disposal of assets worldwide.
You may also need to pay taxes in the foreign country where your assets were located. If you are subject to double taxation, you may be able to claim tax relief. This depends on what tax agreements are in place between the UK and the country you made the gain.
If you are a non-UK resident and you are selling a UK asset, you may need to pay Capital Gains Tax. Many assume that they don’t, only to receive a nasty unexpected bill from HMRC. You’ll need to speak to a tax expert to ensure you’re covered.
