Knowledge is power, especially when it comes to paying Capital Gains Tax on business assets. It's important to remember that when you sell or gift some or all of your business assets, you may be due to pay Capital Gains Tax on them.
Capital Gains Tax is a tax on the profit (or 'gain') you make on an asset, rather than the full worth of the asset itself. Business assets are anything of worth that your business produces, for example, cash, raw materials, your business' reputation and intellectual property, and financial assets like shares.
If you are disposing of business assets, you may be eligible for something called Business Asset Disposal Relief (formerly called Entrepreneurs' Relief), which reduces the amount of Capital Gains Tax you have to pay on assets you dispose of, up to £1 million in your lifetime.
In this article, we're going to cover exactly what Capital Gains Tax for business assets is, how it works and how you can qualify for tax relief to reduce the amount of Capital Gains Tax you pay.
Capital Gains Tax for business assets is the tax you pay on the profits you make from a business asset, when you sell, gift or otherwise dispose of it, and which you work out by comparing the price of the asset at the time you bought it, to how much you sold it for.
If you are gifting a business asset, rather than selling it, or selling an asset that was given to you, you'll calculate Capital Gains Tax by using its Market Value at the time of gifting. Capital Gains Tax for business assets is usually 10% of your profit on an asset, or 20% if you are a higher rate taxpayer.
Capital Gains Tax and disposing of business assets
When we talk about Capital Gains Tax, we describe it as the tax you pay when you 'dispose' of an asset, including a business asset. Disposing of an asset includes:
- Selling it (including selling it for less than its market value)
- Giving it away as a gift
- Swapping it for something else
- Receiving compensation for it, for example, an insurance pay out for something.
Do I have to pay Capital Gains Tax when I gift a business asset?
You have to pay Capital Gains Tax when you gift someone a business asset, unless that person is your spouse or civil partner, and you have lived with them for at least some of the tax year in which you make the gift, and the gift is not trading stock.
If you gift someone a business asset which has increased in value since you first acquired it, you'll usually have to use its market level price, i.e. the amount that you could have sold it for if you had not gifted it, to calculate how much Capital Gain Tax to pay.
If you happen to make a loss on the business asset that you're gifting, i.e. it has fallen, rather than risen, in value since you first bought it, you may be able to deduct these losses, but only from the gains on gifts or other disposals you make to the same person.
You may be tempted sell a business asset to someone for less than it's worth, thinking that you won't be charged any Capital Gains Tax because you won't have made a profit. Be very careful! For tax purposes, if you sell your asset for less, your asset will be evaluated by its market level price.
So, if you have an asset worth £200,000, which you originally bought for £100,000, and you deliberately undersell it to your daughter for £25,000, you would still be seen, in Capital Gains Tax terms, as having made a profit of £100,000 when you sell the asset, and you'll be taxed on that amount. This could leave you at a significant loss.
It's important to note that, while you won't have to pay Capital Gains Tax on business assets you gift to a spouse or civil partner, they will have to pay Capital Gains Tax on any profit the asset makes on the whole time it has been owned by both you and them. So, the spouse or civil partner will be seen as having owned the business asset from the same date you first acquired it, which could lead to a hefty Capital Gains Tax bill when they sell the business asset.
Gift relief for business assets
Gift relief is a useful way for someone gifting an asset to avoid paying Capital Gains Tax when they don't have the funds to do so. However, gift relief only applies to business assets.
Essentially, gift relief allows you to defer your Capital Gains Tax to the person you're giving the business asset to. This makes sense if you have assets worth £300,000, for example, and you give them away for nothing to a family member. You would usually be liable for tax on any profits on the assets, which you might not be able to pay, having given away the asset itself for free. So, instead, the person who acquires the asset from you will pay Capital Gains Tax on however much the asset has grown in value since you first acquired it, as well as any further gains since they themselves have owned it.
How much Capital Gains Tax do I have to pay on business assets?
The amount of Capital Gains Tax you'll pay on business assets depends on your income, and the tax band you belong to as a taxpayer.
Currently, Capital Gains Tax is charged at 10% for basic rate of tax (which you'll pay if your income comes under the bracket of £50,000), or 18% for sales of residential property, which isn't covered by private residence relief (this might include property you're selling off as part of your business, if you received rent on it).
For the higher rate of tax, Capital Gains Tax is charged at 20%, or 28% for residential property.
Even if you usually pay tax at the basic level, the gains you have on selling business assets may be large enough to push you into a higher tax band. If this is is the case, you'll pay some Capital Gains Tax at both the higher and lower rate.
There are several deductions you can make to the amount of Capital Gains Tax that you have to pay on Business Assets, which will reduce the amount of overall tax that you have to pay. These include:
- Your Personal Allowance. When calculating how much Capital Gains Tax you'll have to pay, you always start by adding your income to your chargeable assets (in this case, business assets that you've sold), which will determine whether you fall into the higher or lower tax band that tax year. From this amount, you can deduct the tax free allowance that every tax payer in the UK receives - currently: £12,300.
- Your Capital Gains tax-free allowance. This allowance is in addition to your Personal Allowance, and is the amount you can receive in profits from disposing of a chargeable asset, without having to pay tax. It is currently £12,300. You should use your Capital Gains tax-free allowance against the gain which demands the highest amount of Capital Gains Tax, for example, if you're disposing of a residential property as part of your business, which is taxed at 18 or 28% on profits, rather than 10% or 20% depending on the tax band you belong to.
- Certain costs. You are allowed to deduct certain costs from the overall amount of Capital Gains Tax you pay on business assets you dispose of. These include fees for valuing or advertising assets, costs to improve assets (these exclude ordinary maintenance and repair) and Stamp Duty Land Tax and VAT (except for situations where you an reclaim the VAT). You can't deduct costs you can claim as business expenses (which include everything from office, property and equipment to legal and financial costs) so make sure that you claim all the business expenses you're entitled to before you sell your business assets!
How do I work out Capital Gains Tax for business assets?
Again, there are two rates of Capital Gains Tax that you can pay, depending on whether your income, including chargeable assets (assets that are due for Capital Gains Tax), puts you into the higher tax band or not.
Hugh's taxable income for this year is £25,000 (after deducting his personal allowance), and he is disposing of business assets worth £100,000. None of Hugh's business assets are residential property, and he has not applied for any Capital Gains Tax Relief.
When Hugh first bought these assets, they were worth £50,000. This gives him a profit of £50,000, which is the gain between the business asset when he bought it, and the amount he is selling it for now.
Hugh deducts his Capital Gains tax free allowance (£12,300). He also deducts allowable expenses of £2,000.
After deducting this amount (£14,300), Hugh is left with £35,700 on which he must pay Capital Gains Tax. Hugh will pay the lower Capital Gains Tax rate (10%) on £25,000 of this gain. This is because he has already used up £25,000 with his income this year (the limit to pay the lower rate of Capital Gains Tax is £50,000).
He will pay the higher rate of Capital Gains Tax (20%) on the remaining £10700. 10% of £25,000 is £2500 and 20% of £10700 is £2140. Together these figures make £4640, which is the amount of Capital Gains Tax that Hugh has to pay on his business assets.
Remember that if you're disposing of business assets that are residential property, you'll be charged 18% Capital Gains Tax at the lower rate, and 28% at the higher rate.
Business Asset Disposal Relief
Business Asset Disposal Relief (formerly called Entrepreneurs' Relief) is a tax relief that significantly reduces the amount of Capital Gains Tax you have to pay on a business asset.
If you qualify for Business Asset Disposal Relief on one or more of your business assets, you'll only pay the lower rate of Capital Gains Tax (10%), even on gains that would usually push you into the higher rate of Capital Gains Tax (20% or 28% for residential property).
You can claim Business Asset Disposal Relief on gains up to £1 million pounds in your lifetime, and for multiple businesses.
Who can get Business Asset Disposal Relief?
You can qualify for Business Asset Disposal Relief if you are or have been a sole trader, officer or employee of the company who is disposing of its assets. Company directors and partners in a business who dispose of all of part of a trading business are also eligible for Business Asset Disposal Relief.
You must hold 5% or more in shares in the company, and 5% of voting share capital (shares that give you the right to vote on corporate policymaking). For shares to qualify, the business must be a trading company, or the holding company of a trading group.
For example, if the company is being wound up because it is insolvent and not carrying on any trading activities, it might be difficult to qualify for Business Asset Disposal Relief.
HMRC also has a rule that if a company's activities include more than 20% of activities which are not 'trading activities', they are not considered to be a trading company for Business Asset Disposal Relief purposes. How you define this 20% can be complicated, so it is best to contact HMRC for advice on your specific circumstances.
You can claim for Business Asset Disposal Relief through your Self Assessment tax return, or by filling in Section A of the Business Asset Disposal Relief helpsheet (HS275).
Which assets qualify for Business Asset Disposal Relief?
Business Asset Disposal Relief covers both business assets and shares. Any time you dispose of business assets, shares or securities, you may be eligible to claim Business Asset Disposal Relief.
Can I claim Business Asset Disposal Relief on property?
You may be able to claim Business Asset Disposal Relief on some types of property, which is a huge plus, considering the higher rate of Capital Gains Tax you usually pay for disposing of residential property (18% rather than 10% for the lower rate of tax, and 28% rather than 20% for the higher rate).
However, you will only be able to claim Business Asset Disposal Relief on property if:
- The disposal of the property is part of your wider disposal of the business that the property was part of, or its shares.
- You have not charged any rent for using the property. If you have charged rent, your property is considered an investment, rather than being employed solely for the business, and so you will not be eligible for Business Asset Disposal Relief.
A good example of a property that might be eligible for Business Asset Disposal Relief is a furnished holiday let. This is because furnished holiday lets are treated as trade, and so qualify for Business Asset Disposal Relief.
To qualify as a furnished holiday let, your property must be available to be let by the public for a minimum of 210 days in the tax year, and actually be let for a minimum of 105 days. You must not allow lettings of more than 31 consecutive days to the same tenant exceed 155 days.
Now that we've covered every detail of Capital Gains Tax for business assets, how much Capital Gains Tax you'll have to pay on your business assets, and how you can qualify for Business Assets Disposal Relief, we hope you've found it a useful and informative read. Selling off all or some of your business, valuing your business assets and then calculating Capital Gains Tax can be complicated, but the sooner you grasp the basic elements of Capital Gains Tax, the easier it becomes. You can always call HMRC on 0300 200 3300 for advice on Capital Gains Tax for your specific situation, or contact an accountant.