Capital Gains Tax (CGT) Overview: Calculation, Consequences, and Reliefs

What is CGT?

Capital Gains Tax is applicable to the profit made when you sell, or ‘dispose of,’ an asset that has increased in value. This can be property, company shares, works of art, and business assets. 

What is CGT chargeable on?

CGT is applicable to assets that can increase in value over time, like property. This is because these assets can be seen as investments and generate income, therefore, they should be taxed.

The business assets that you may need to pay tax on include:

• Land and buildings;

• Fixtures and fittings;

• Plant and machinery.;

• Shares;

• Registered trademarks; and

• Business’ reputation.

For instance, you could be charged CGT if you own a business that purchased an asset in 2015 for £50,000. In 2023, you have decided to sell that asset for £65,000, resulting in a gain of £15,000. CGT will be paid only on the £15,000 profit on selling the asset.

Who pays CGT? 

Capital Gains Tax will only apply to your business if you’re a self-employed sole trader or are part of a partnership. Companies will pay Corporation Tax on the profits made from selling their assets.

How is CGT calculated?

Capital Gains Tax will be paid on the profit made, so for that reason, the steps to have in mind, are the following:

1. Identify a chargeable disposal: A chargeable disposal in this situation is where you sell, or dispose of, an asset that can incur CGT, as listed above.

2. Calculate the gain: which is usually the difference between what you paid for it and what you are selling it for.
   Some costs that can be deducted here are fees, costs to improve assets or Stamp Duty Land Tax (SDLT) and VAT.
   If you gave the asset away, sold it for less than what it was worth to help the buyer, inherited it or owned it before April 1982, the market value should be used instead. 
   Market value can be checked by HMRC. After disposing of the asset, and completing a ‘Post-Transaction Valuation check’ form HMRC will provide you with the information. 

3. Potential Reliefs: Some of the reliefs are available for businesses, and it is recommended that you apply them if you meet the requirements.

   *see below for reliefs.
   

4. Aggregate any gains and losses and deduct annual exemption: The Annual Exemption is the gain that can be made free from this tax. The CGT allowance for the tax year 2023/2024 is £6,000, which means any gains on assets over the value of £6,000 will be affected by the CGT rate on the excess amount.

5. Apply the CGT rate of tax: The rates for businesses are the following:

• If your business falls under the basic rate of Income Tax, CGT will be paid at 10%, unless you sell residential property that is not your main home, in which case CGT will be paid at 18%.

• If your business falls under the higher rates of income tax, CGT will be rated at 20%, unless residential property is the asset being sold, which will be rated at 28%.

However, if you are a sole trader/partnership and you qualify for Business Asset Disposal Relief due to your gains, you will pay 10% of CGT on the gain made, which happens in the majority of the cases. 

Consequences of not paying CGT

Failure to pay for CGT could result in a fine and having to pay significantly more than what you originally owed, in interest. 

Reliefs:

RELIEF AVAILABLE	DESCRIPTION
Business Asset Disposal Relief	It allows sole traders, business partners, or individuals with shares in a ‘personal company’ to pay a reduced Capital Gains Tax rate of 10% when selling all or part of their business. Lower than the normal Capital Gains Tax rates.
Business Asset Rollover Relief	It enables individuals to defer the payment of CGT when selling or disposing of certain types of assets used in their business. They can delay the tax payment by reinvesting the proceeds from the sale into a new asset that is used in the business. The new asset must be purchased within 3 years of disposing of the old one.
Incorporation Relief	It allows individuals to delay the payment of CGT when they transfer their business to a company. In this case, the individual transfers their entire business and its assets (excluding cash) to the company in exchange for shares. By doing so, they can defer the CGT liability.
Gift Hold-Over Relief	It enables individuals to avoid paying CGT when they gift a business assets to someone else. Instead, the person receiving the gift will be liable for the tax when they sell the asset. To qualify for this relief, the individual must have used the business asset for trading as a sole trader or partner.

Author: Irene Correro-Garcia -

Author: Irene Correro-Garcia -

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DISCLAIMER

This article has been written by law students for the sole purpose of providing informative insight. The information in this article is intended for educational purposes only and does not constitute legal advice, nor should the information be used for the purpose of advising clients. You should seek independent legal advice before relying on any of the information provided in this article.

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