As one of London’s leading SME accountancy firms, we’re often fielding questions about Capital Gains Tax for small businesses.

Concerned about their tax liability when selling assets – or their business – sole traders and business owners sometimes become bogged down in how Capital Gains Tax (CGT) is calculated and the various reliefs that can be applied.

However, there’s no need for concern; with proper forward tax planning and an understanding of how it functions, CGT is straightforward.

Read on for an overview into Capital Gains Tax for small businesses.

What is capital gains tax?

In the case of CGT, the Government provides a clear, top line explanation.

Put simply, CGT is a tax paid on the profit made when selling a business asset. Note: you may see “disposing” used in place of “selling” when dealing with CGT.

“Business assets” is a broad term referring to physical assets such as land, machinery and equipment, fixtures and fittings, as well as non-physical assets such as shares and trademarks. 

Selling the business in its entirety (encompassing all the aforementioned assets) can also be subject to CGT.

How much CGT will my small business pay?

This depends on your tax band and the type of asset you’re selling. There are also different rates for property compared to other assets.

The first step to working out how much Capital Gains Tax a small business needs to pay is to deduct the value paid for the asset from its selling value. 

Further deductions can also be made, such as legal fees, advertising costs, and the cost of improving/developing the assets. This reduces the amount of CGT that needs to be paid.

Note: Capital Gains Tax is subject to a tax-free allowance. For the 2021-22 tax year, this is £12,300. This means you can make a profit of up to this amount before owing any CGT.

What is Entrepreneurs’ Relief?

Commonly known as Entrepreneurs’ Relief, this tax break is now formally referred to as Business Asset Disposal Relief.

Business Asset Disposal Relief limits the percentage of CGT on business, shares or asset sales to 10% with an individual lifetime limit of £1 million in profit. 

This represents a significant tax saving; therefore, it’s important to seek advice to ensure you meet the necessary criteria to take advantage of this before selling your small business. For example, you must have owned the business or assets for a minimum of two years.

If you’re closing the business, there are steps to take to ensure tax relief on assets sold: you must have sold all business assets in less than three years to qualify for relief.

What other CGT reliefs are there?

There are various other CGT reliefs available to small business owners.

If you are reinvesting the profit made on an asset sale into the purchase of new assets, Rollover Relief may apply. This means that CGT is only payable on the sale of the new assets.

Another relief to be aware of is Gift Hold-Over Relief. This is used to defer CGT if you are gifting your business to a spouse or children as opposed to selling it.

Note: inflation factors into the amount of CGT you may have to pay. This is where Indexation Allowance comes in, offering a potential tax deduction based on the HMRC’s Indexation Allowance Guide.

Capital Gains Tax for small businesses

While the above demonstrates that Capital Gains Tax doesn’t have to be complex, we’d always advocate seeking expert advice when it comes to tax planning to ensure you don’t pay more than you should.

Why not get in touch with our team today for a no-obligation chat to ensure your affairs are in order?