What is capital gains tax?

If you run your own business, it’s important to have a basic understanding of the rules surrounding capital gains tax and whether they apply to you. Our simple guide shows you how capital gains tax works, how it’s calculated and what you pay it on.

If you run your own business, it’s important to have a basic understanding of the rules surrounding capital gains tax and whether they apply to you. Our simple guide shows you how capital gains tax works, how it’s calculated and what you pay it on.

Emily Kindness
Business insurance expert
5
minute read
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Posted 22 DECEMBER 2021

What is capital gains tax? 

Capital gains tax (CGT) is a tax on the profit you make when you sell or give away an asset that has increased in value. It’s the profit that’s taxed, not the total you’ll receive for the asset. 

Business assets you may need to pay tax on include: 

  • land and buildings
  • fixtures and fittings
  • plant and machinery – for example, a digger
  • shares
  • registered trademarks
  • your business’s reputation (HMRC sees this as a measurable asset when you sell a business). 

CGT can apply if you’re self-employed as a sole trader or in a business partnership. It’s another thing you may need to think about when planning ahead, along with business insurance and budgeting. 

Other organisations, like limited companies, pay corporation tax on profits from selling their assets. 

Find out more about the differences between sole traders and limited companies.

What is the capital gains tax allowance? 

Everyone gets a capital gains tax allowance, which means you only have to pay tax on profits from assets that are above this threshold. For the 2021-22 tax year, you can make £12,300 of gains before you’re taxed (or, for trusts, the first £6,150) – and this figure will be frozen until 2026.

So, you’ll have to take this into account when working out how much CGT you owe. If your gains are below this amount in the tax year (6 April to 5 April), there’ll be no CGT to pay. 

If you don’t make full use of your tax-free allowance when selling your assets, you can’t carry it forward to the next tax year.

How much is capital gains tax in the UK? 

The tax system is rarely simple to navigate, and CGT is no exception. There isn’t one standard rate that everyone pays, so it may not be straightforward to work out. There are two main sets of rates of capital gains tax – one for property and one for other assets. How much you pay depends on: 

  • the type of asset you’ve sold
  • profit or gain made
  • your income tax band and the current tax-free allowance

UK capital gains tax rates 

For the 2021/22 tax year, the capital gains rates are as follows:

Tax band

CGT rate on property

CGT rate on other assets

Basic rate taxpayer

18%

10%

Higher or additional rate taxpayer

28%

20%

You don’t usually need to pay tax on gifts to your spouse, civil partner or a charity. Visit gov.uk to find out more about tax bands and rates.

Can you get tax relief on capital gains? 

Over the years, successive governments have brought in a number of tax reliefs around CGT that you might be able to use to reduce or delay the amount you have to pay. These include: 

  • Business Asset Disposal Relief: sole traders and business partners can get a reduced 10% CGT rate on qualifying profits if they sell all or part of their business. This is designed to incentivise entrepreneurs to grow a business.
  • Incorporation relief: you can delay paying CGT when transferring your business to a company in return for shares.
  • Business asset rollover relief: you can delay paying CGT if you sell or give away assets that you’ll replace. You must buy the new asset within three years of disposing of the old one.
  • Gift hold-over relief: you don’t have to pay CGT if you gift a business asset to someone. The person you give it to pays tax when they sell it. You need to have used the business asset for trading as a sole trader or partner.

How to calculate capital gains tax 

To work out how much (if anything) you’ll have to pay, you will need to: 

Calculate the gain
This is the difference between how much you paid for the asset and how much you sold it for. In some cases, you might need to use the market value, for example if the asset was a gift or you inherited it. 

Deduct costs and tax allowance
In addition to the tax-free allowance you already get, you can subtract certain costs from the gain. These include fees for advertising the asset, funds spent on improving it, legal fees associated with the sale and stamp duty and VAT. 

There are some costs you’re not allowed to deduct, including interest on a loan to buy the asset or costs you can claim as business expenses. 

If you’re not confident about the calculation or what you can and can’t claim for it’s a good idea to seek the advice of a tax specialist, otherwise you could end up paying the wrong amount.

See if you can claim tax relief
Tax reliefs can reduce the amount of CGT you need to pay. As mentioned above, these include entrepreneurs’ relief, incorporation relief, business asset rollover relief and gift hold-over relief. 

Capital gains tax example
We’ve laid out some mock costings to give you a basic idea of how CGT is calculated: 

  • Your total taxable income = £20,000
  • Your taxable gains from selling shares in your business = £12,600
  • Your tax-free allowance of £12,300 is deducted from your gains of £12,600
  • That leaves you with tax owed on £300
  • Assuming you’re a basic rate taxpayer, you’ll pay CGT at 10%
  • On a £300 gain, your CGT bill = £30

Working out capital gains tax is a complicated process, so it’s recommended you speak to a qualified accountant or tax adviser. They will be able to help you with the calculations and make sure you don’t make any costly mistakes when filing your tax return.

Frequently asked questions

How do I pay capital gains tax?

To pay CGT on property, you’ll need to use a HMRC capital gains tax on UK property account and settle your bill within 30 days of the sale. You can report all other assets using the ‘real time’ capital gains tax service or just wait until you fill out your next self-assessment tax return.

What are capital losses?

A capital loss is incurred when you sell an asset for less than you bought it for. You can offset losses against any capital gains you make in the same tax year. If you’ve made a loss overall, you can carry it forward to a future tax year.

How can I reduce capital gains tax when selling an asset?

It’s a good idea to plan any business sale in advance to make sure you take advantage of any tax reliefs you may be eligible for and structure the sale in the most tax efficient way. You should also try to maximise the potential sale value. It might be best to seek expert advice from an accountant so you don’t pay more CGT than you have to.

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