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.

Written by

Mubina Pirmohamed

Business and landlord insurance expert

Last Updated

13 AUGUST 2024

5 min read

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 2024/25 tax year, you can make £3,000 of gains before you’re taxed (or, for trusts, the first £1,500).

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?

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 2024/25 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	24%	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?

There are 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 business asset disposal 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 (basic rate taxpayer)
Your taxable gains from selling shares in your business = £12,600
Your tax-free allowance of £3,000 is deducted from your gains of £12,600
That leaves you with tax owed on £9,600
As you’re a basic rate taxpayer, you’ll pay CGT at 10%
On a £9,600 gain, your CGT bill = £960

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

Looking for business insurance cover?

Compare business insurance from leading insurance providers

Get a quote

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 60 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, with some limitations.

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.