Starting a new business? Get 40% off our accountancy services for 3 months! 😎

x

Capital Gains Tax (CGT) is a tax on the profit (the gain) that you make when ‘disposing’ of an asset which you own. Disposal of an asset usually means that it’s been sold, but it can also mean giving it away, swapping it for something else, or receiving compensation for its loss.

Capital Gains Tax normally only applies to individuals, or where there’s no legal distinction between you and your business.

 
For instance sole traders or someone in a partnership can be liable for CGT. An incorporated business (such as a limited company) will pay Corporation Tax on any profit it makes from disposing of a business asset.

Capital Gains Tax can get a bit complicated, so in this post we’ll take you through the basics and give you some simple scenarios to show you how it works.
 

Capital Gains Tax for individuals

Capital Gains Tax for businesses

Working out your gain for Capital Gains Tax

Capital Gains Tax allowances, reliefs, and rates

Examples of working out Capital Gains Tax

Most of us won’t need to think about Capital Gains Tax that often, but if you dispose of a valuable asset it might cross your radar. The most frequent questions around Capital Gains Tax relate to houses and cars.

Will I need to pay Capital Gains Tax when I sell my house?

Property prices have risen rather dramatically over the years, so the sale of your house might mean a very substantial gain indeed. The good news is that you won’t normally need to pay Capital Gains Tax on property as long as:

Do I need to pay Capital Gains Tax if I sell my car?

If you’re lucky enough to make money on the sale of your car, then you won’t pay Capital Gains Tax on this as long as it has not been used for business purposes.

This goes for classic cars too. So, if you have an E-type sitting in the garage, you can decide to sell it and release the massive gain it has made over the last few years, without getting clobbered by tax.

What assets are exempt from Capital Gains Tax?

The key here is what the asset was used for, and how much you get when you dispose of it. Any profit on selling your car is exempt from Capital Gains Tax as long as the car wasn’t used for business. Your main home that you own is usually exempt too, as are:

Do be aware though that just giving away something (unless it is to your spouse or a charity) will be treated exactly like selling it, and you’ll need to declare the value at the time of sale.

Sensible tax planning is perfectly acceptable, but we’d never advise people to try and pull the wool over HMRC’s eyes. They have seen it all before!

If your business is a limited company, then it won’t pay Capital Gains Tax. Instead, any gains are taxed as Corporation Tax. It’s a bit different if you operate as a sole trader or partnership though.

Because there’s no legal distinction between you and your business, any gains the business makes are considered ‘yours’. As such you’ll need to include capital gains as part of your Self Assessment tax return.

Whilst a sole trader will be responsible for all of the gain that they make, partners will only need to work out their share of each gain or loss according to their share in the partnership.
 

Comprehensive tax return services

From only £24.50 per month

Learn more

Different type of assets in a business

When we talk about Capital Gains Tax for businesses, then it’s important to understand what the term asset means within a business context. A business might have two different types of asset that it uses.

Current assets

The first are assets that they use for trading. This might include things like stock that you sell to customers, raw materials to create products, or working capital.

In accounting terms, these are seen as things that will be used up within the next 12 months, so although they are assets, they are short-term in nature.

From a taxation point of view, these short-term assets form part of the trading of the business. If the business makes a profit when it comes to sell them, then it will pay tax in the normal way.

Fixed assets

The second category are long-term assets. In other words, things that are likely to be around for more than a year, and it is this category that is liable to capital gains tax.

It is also important to remember that a gain doesn’t have to be made on a physical thing. Capital Gains Tax can also be payable on intangible items like brands, trademarks, patents, and shares in other companies.

We do need to reiterate that capital gains tax is a complex area for businesses. For instance, a business set up to invest in fine art will pay tax differently to a business that just happens to have made a gain on some art it had on their office wall.

Capital Gains Tax is worked out based on the profit that you make, rather than on the full amount of the sale. In plain terms, it’s the difference between what the asset was worth when you acquired it, and what you sold it for.

You can deduct eligible costs from the gain, and then pay Capital Gains Tax on the amount left over.

 
For example, if you paid advertising fees to sell the asset, or you spent money to improve the asset beyond normal repairs, you can deduct these costs from the gain you make.

It’s not all doom and gloom, and there is a tax-free allowance available before you start paying Capital Gains Tax. Known as the Annual Exempt Amount, the allowance you’re entitled to depends on whether you’re an individual or a trustee.

Tax Year Individuals Trustees
2022/23 £12,300 £6,150
2023/24 £6,000 £3,000
2024/25 £3,000 £1,500

 

So, if you’re an individual and the total of all gains is less than £6,000 in 2023/24, then you won’t pay any Capital Gains Tax at all.

If all your gains for the year total £10,000 you’ll only pay Capital Gains Tax on the portion of the gain which is over the allowance (in this example, £4,000 is taxable). And never forget! We’re looking at the gain here, and not the sale price.

Do I need to report capital gains below the allowance?

No, you only need to report and pay Capital Gains Tax on taxable gains above the allowance.

Capital Gains Tax relief for businesses

There are CGT relief schemes available, such as Business Asset Disposal Relief, if you need to pay Capital Gains Tax on gains that you make through your business. The eligibility criteria and the level of relief available does vary, so it’s always worth getting advice!

How much Capital Gains Tax will I pay?

The rate of Capital Gains Tax that you pay on the gains you make above the allowance depends on what the asset is, and the rate of income tax you pay.
 

Capital Gains Tax Rates

The rate of Capital Gains Tax

The rate of Capital Gains Tax that you’ll need to pay depends on the items that you dispose of, and what type of taxpayer you are. The Capital Gains Tax rate has stayed the same throughout the 2022/23, 2023/24, and 2024/25 tax years.
 

Basic Rate Taxpayer Higher Rate Taxpayer Trustee
Gains from residential property 18% 28% 28%
Gains from other chargeable assets 10% 20% 20%

 

So far this may all seem a little theoretical so we thought it would be helpful to include an example. The starting point is to work out your gain.

This is simply the selling price, minus the cost of acquiring the asset. Remember that you are also allowed to offset any costs of selling, purchase costs, and the value of any improvements you have made in the meantime.

John makes a profit selling a painting he bought a few years ago. It is his only gain in the 2023/24 tax year. He currently earns £22,000 per year from his full-time job.
 

Proceeds from the disposal
What did John get in return for disposing of the asset? In this example, it’s the price he sold the painting for.
£30,000
Total costs and expenses
What John spent on the asset.

Auction fees: £3,000
Original purchase cost: £10,000
£13,000
Total gain
The proceeds from the disposal, minus the total costs.
£17,000
Total taxable gain
The total gain, minus the Annual Exempt Amount, which is £6,000
£11,000
John’s income for the tax year
In this case it’s the taxable gain he made, plus his salary.

Salary: £22,000
Total taxable gain: £11,000
£33,000
The rate of Capital Gains Tax
To work out which rate of Capital Gains Tax to use, remember:

John’s total income for the year is within the basic rate tax band
The gain is from a chargeable asset, not property
10%
Capital Gains Tax to pay
The total taxable gain multiplied by the rate of Capital Gains Tax
£1,100

Tax is complicated, which is why it’s useful to chat with someone who knows their way around the subject. Learn more about our online accounting services for businesses, and make the most of any tax allowances and reliefs available. Call 020 3355 4047 or get an instant online quote.

About The Author

Elizabeth Hughes

A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible. Learn more about Elizabeth.

More posts by this author
Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments

Read more posts...

Staff Spotlight: Charlotte Hughes, Accounts Junior

This month we spoke to Charlotte Hughes, Accounts Junior at The Accountancy Partnership! Give an overview of the duties, functions and responsibilities…

Read More

Staff Spotlight: Rebecca Boyd, Accounts Junior

This month we spoke to Rebecca Boyd, Accounts Junior at The Accountancy Partnership! Give an overview of the duties, functions and responsibilities…

Read More

February 2024 Client of the Month: CHERESHNIVSKA

This month we spoke to Iryna, CEO and Founder of CHERESHNIVSKA!  CHERESHNIVSKA | Instagram | Facebook Hey Iryna! Tell us about your business CHERESHNIVSKA…

Read More
Back to Blog...

Confirm Transactions

The number of monthly transactions you have entered based on your turnover seem high. A transaction is one bookkeeping entry such as a sale, purchase, payment or receipt. Are you sure this is correct?

Yes, submit my quote
No, let me change it

Please contact our sales team if you’re unsure

VAT Returns

It is unlikely you will need this service, unless you are voluntarily registered for VAT.

Are you sure this is correct?

Yes, the business is VAT registered
No, let me change it

Call us on 020 3355 4047 if you’re not sure.

Bookkeeping

You will receive our bookkeeping software Pandle for free, as part of your package.

You can use this to complete your own bookkeeping, or we can provide a quote to complete your bookkeeping for you.

Please select and option below:

I will do my own bookkeeping
I want you to do my bookkeeping

Call us on 020 3355 4047 if you’re not sure.