Capital gains tax for business: what to know before you sell

When you’re running a business, you will likely own a number of different business assets. These assets might be property, machinery or vehicles, for example. When you sell an asset, you may have to pay tax on the profit you make from the sale – this is known as capital gains tax.

Sole traders and business partners will need to pay capital gains tax on the profits from these gains. There are also some circumstances where limited company owners and shareholders may be liable for capital gains tax on certain gains. 

In this article, we’ll cover how capital gains tax works, when it applies and how to manage it, both as an individual and as a business or company. 

What is capital gains tax and when does it apply to businesses?

Capital gains tax (CGT) is the tax you pay when you make a profit on the sale of an asset. You don’t pay CGT on the full sale price, only on the gain (the additional profit) you’ve made since first owning the asset.

So, for example, let’s say you’d bought a painting for £5,000 and sold it later for £25,000. Having sold the artwork, you’ve made a gain of £20,000 (£25,000 minus £5,000). As an individual taxpayer, you’ll be liable to pay CGT only on the £20,000, not the full sale price. 

When might CGT apply to business owners? 

If you’re trading as a limited company, the company itself won’t pay CGT. You and your business are two distinct and separate entities and the company will usually pay corporation tax on any gains you make when disposing of assets. 

However, if you’re a sole trader, or a partner in a partnership, then you will be liable for CGT on the sale of some assets. 

When can owners or directors of limited companies be liable for CGT?

As we’ve seen, limited companies don’t pay CGT on the disposal of assets. However, as the owner or director of a limited company, you personally may be liable to pay CGT on assets you dispose of and gains you make. 

This can include:

• Selling your business and making a profit from the sale
• Selling your shares in the business and making a gain
• Selling property and making a gain on the sale.

Whether you pay CGT on the disposal of an asset comes down to what type of legal structure your business has, and whether you’re an owner or shareholder in the business (if you’re a limited company).

It’s important to understand these distinctions, so you’re aware when the sale of an asset may trigger a CGT liability. 

Which business assets are subject to capital gains tax?

Various business assets can be liable for CGT, depending on your legal business structure and whether the asset is seen as a trading asset or a personal asset.

Assets that can attract a CGT liability include:

• Land and buildings: For example, the factory premises you own as a manufacturing business, or the land you own as a dairy farm. 
• Fixtures and fittings: For example, fixtures such as the central heating system or kitchen cupboards, or fittings like carpets and curtains. 
• Plant and machinery: For example, heavy machinery like an excavator, vehicles owned by the business, or IT hardware like desktop computers etc. 
• Shares: For example, shares you own in the company, units in collective investment schemes or shares acquired through an employee share scheme. 
• Registered trademarks: Your business’s registered trademark is a form of intellectual property and included within the scope of chargeable assets
• Your business’s reputation: also known as ‘good will’ , this is the reputation and customer connection you sell when selling your business to a buyer. 

What’s the difference between personal and trading assets?

Some assets will be owned by you, as a private individual. This will include assets like your shares in the business. These are personal assets, and you, personally, will be liable for the CGT that’s due when disposing of the asset. 

Other assets will be owned by the business, including operational assets like machinery, plant and equipment etc. These are trading assets.

If you’re a sole trader or partner in a partnership, you’ll be liable for the CGT that’s payable when selling these trading assets – you and your business are seen as one entity by HM Revenue and Customs (HMRC). 

If you’re a limited company, you will not pay CGT on the gains made when selling trading assets. Instead, you’ll pay corporation tax on the gains made. 

Special rules for selling part vs all of a business

You may be selling all of your business, or only part of your business. Whether it’s a whole or part sale may affect the way you’re charged CGT.

Sole traders and partners in a partnership can claim Business Asset Disposal Relief (BADR). But under the BADR rules for selling part of the business, you must prove that the part being sold is a separate and distinct part of the larger business.

For example, your business might have two branches and may only be selling one branch. Or you might have two distinct service lines and customer bases within your business. For example, you might have a garage business that sells cars but also has a car valeting business that, to all intents and purposes, is a separate enterprise.

Proving that your part sale qualifies for BADR can be complex, so it’s always worth consulting with a professional tax adviser to ensure you’re eligible.  

Does capital gains tax apply to selling a business property?

Yes, selling a business property in the UK typically makes the owner liable for capital gains tax (CGT) on any profit they make from the sale. This profit, or gain, is the difference between the sale price and what you originally paid, plus certain costs. 

You’ll pay CGT on the sale of your business property if you’re:

• A sole trader selling their property
• A partner in a partnership that’s selling a business property

Remember, limited companies do not pay CGT on gains made from the sale of company-owned assets. These gains are liable for corporation tax, not CGT. 

Capital gains tax rates and allowances for business owners

There are different capital gains tax rates depending on whether you’re a higher-rate, additional-rate or basic-rate taxpayer.

If you’re a higher or additional rate taxpayer, the amount you pay will depend on the date and type of your gain.

For gains from 6 April 2025 onwards, you’ll pay:

• 24% on your gains from residential property
• 32% on your gains from ‘carried interest’ if you manage an investment fund
• 24% on your gains from other chargeable assets.

If you’re a basic rate taxpayer, the rate you pay depends on the size of your gain, your taxable income and whether your gain is from residential property or other assets.

For gains from 6 April 2025 onwards you’ll pay:

• 18% on your gains from residential property
• 32% on your gains from ‘carried interest’ if you manage an investment fund
• 18% on your gains from other chargeable assets.

Don’t forget the annual exemption allowance for any capital gains. This tax-free allowance is currently set at £3,000. You don’t pay any tax on the first £3,000 of your taxable gains, so this needs to be factored in when calculating what CGT you might pay on your total gains during the year. 

Reliefs and exemptions: how to reduce your capital gains tax bill

If you’re liable for capital gains tax, there are ways to reduce your CGT bill by making use of the many business tax reliefs and exemptions that are available to you.

Reliefs are generally used as a way to encourage enterprise and entrepreneurship among business owners. In most cases, this is done by cutting the rate at which you pay tax, based on the eligibility criteria for the relief.

Here’s a summary of the currently available reliefs that could help to minimise your overall CGT bill:

1. Business Asset Disposal Relief (formerly Entrepreneurs’ Relief)

Business Asset Disposal Relief (BADR) allows you to reduce the CGT you pay when you dispose of all, or part, of your business. To qualify for the relief, you must be a sole trader or business and have owned your business for at least two years. 

Instead of the usual CGT rates (see the previous section), BADR allows you to pay CGT at 14% on all gains on qualifying assets disposed of from 6 April 2025 (and 10% on all gains on qualifying assets disposed of on or before 5 April 2025).

You can claim a total of £1 million in Business Asset Disposal Relief over your lifetime.

2. Business Asset Rollover Relief when reinvesting in new business assets

Business Asset Rollover Relief allows you to reinvest the gain you make when selling one asset to pay for a new asset. You won’t pay any tax on the original gain until you sell the new asset – so, in essence, it’s a way to defer paying CGT on your initial gain.

You can use Business Asset Rollover Relief to rollover your gains on land, buildings, plant and equipment. 

To qualify for the relief:

• You must buy the new assets within three years of selling or disposing of the old ones (or up to one year before)
• Your business must be trading when you sell the old assets and buy the new ones
• You must only use the old and new assets for trading.

3. Incorporation Relief

Incorporation Relief allows you to delay the payment of CGT if you incorporate your sole-trader or partnership business into a limited company. You swap ownership of the business for shares in the limited company. 

By making this swap, you won’t pay any tax until you sell your shares in the company. At this point, the sale of the shares will qualify as a gain and will be liable for CGT. 

To qualify for Incorporation Relief, you must:

• Be a sole trader or in a business partnership
• Transfer the business and all its assets (except cash) in return for shares in the company.

4. Gift Hold-Over Relief

Gift Hold-Over Relief allows you to give away business assets, including qualifying shares. You can also sell assets for less than they’re worth to help the buyer.

Under the relief, you don’t pay CGT when giving away the assets in question. Instead, the person who received the assets will pay CGT (if any is due) as and when they dispose of the asset. In short, the CGT liability is passed to the receiver of the gift.

To qualify for the relief:

• You must be a sole trader or business partner, or have at least 5% of voting rights in a company (known as your ‘personal company’)
• You must use the assets in your business or personal company.

4. Strategic tax planning to minimise liabilities

Working with your tax adviser and finance director to create a strategic tax plan is an important way to minimise your CGT liability. If reliefs, such as BADR, are available, make sure you claim them. This helps make the disposals of your business assets as tax-efficient as possible – cutting your tax bill and saving you money. 

Use your annual exemption allowance (AEA) for CGT (currently £3,000) against the gain, so you only pay tax on the amount above the £3,000 threshold. You can also transfer assets to a spouse or civil partner before disposal (a tax-free transfer) to make use of their separate AEA as well.

Another strategy is to use offset losses from other assets. You can offset any capital losses from the sale of other assets in the current or prior tax years to offset your current gain. This will help to reduce your overall chargeable gain.

What is Business Asset Disposal Relief and who qualifies for it?

Business Asset Disposal Relief offers relief against capital gains tax. Its aim is to encourage entrepreneurs to start their own business. The relief allows you to pay capital gains tax at a reduced rate when you sell the business and make a gain. 

How to report and pay capital gains tax when selling a business

You’ll need to report and pay your CGT at the end of each financial year, taking into account the total gains you’ve made when disposing of assets during the period.

How to calculate your CGT tax rate

If you know your total taxable income and the total amount of gains you’ve made during the year, you have the numbers needed to calculate your CGT rate. 

Here’s how to make the calculation:

• Work out your total taxable income: Your taxable income is your income for the period, minus your personal allowance and any other income tax reliefs that you’re eligible to claim as a taxpayer. 
• Work out your total taxable gains: This is the total of all the gains you’ve made selling your assets during the period. 
• Deduct your tax-free allowance from your total taxable gains: Subtract the annual CGT exemption (currently £3,000) from your total gains: you only pay tax on the remaining amount.
• Add this amount to your taxable income: Combine your taxable gains (after the allowance) with your total taxable income to see which tax band you fall into.
• Check if the basic-rate tax band applies: If this amount is within the basic income tax band, you’ll pay 18% on your gains made from 6 April 2025 (or 32% on carried interest).
• Check if the higher-rate tax/additional-rate tax band applies: For any amount above the basic income tax band, you’ll pay 24% on gains made from 6 April 2025 (or 32% on carried interest).

How to report your CGT

You have two options when reporting your CGT to HMRC. You can use the standard self-assessment process, as used by sole traders and business partners. Or you can use HMRC’s real-time Capital Gains Tax Service through the Government Gateway. 

1. Self-assessment: To report via self-assessment, you’ll need to fill out the additional Capital gains summary (SA108) form. Declare all gains (and losses) you made during the year to find your total taxable gains. 
2. Real-time Capital Gains Tax Service: You can use the real-time service to report on any UK gains you make, apart from residential property sales. It’s generally a quicker way to report your gain. 

You must report your capital gains by 31 December in the tax year after you made your gain and pay by 31 January.

What penalties do you pay for late filing or late payment?

HMRC will hit you with a penalty if your self-assessment return is late, or you fail to pay the required income tax and capital gains tax by the stated deadline. 

If you’re late filing your self-assessment tax return, you’ll face the following penalties: 

• An initial £100 penalty 
• After 3 months, additional daily penalties of £10 per day, up to a maximum of £900 
• After 6 months, a further penalty of 5% of the tax due or £300, whichever is greater 
• After 12 months, another 5% or £300 charge, whichever is greater

If you’re late paying your tax bill, you’ll get penalties of 5% of the tax unpaid at: 

• 30 days 
• 6 months 
• 12 months 

Do you need to report gains if they are below the tax-free allowance?

Generally, individual UK taxpayers don’t need to report any capital gains if the total gain falls below the current £3,000 annual exemption allowance. 

However, you do need to report on gains below the AEA threshold in two scenarios. 1) If the total amount you sold the assets for was more than £50,000, or 2) You’re registered for self assessment (i.e. you’re a sole trader, business partner or any taxpayer submitting a self-assessment tax return). 

iwoca: Flexible finance to help you bridge those urgent cash gaps

Waiting for the funds from the sale of an asset to clear can be problematic. If you’re due to pay your tax bill, but still don’t have the sale proceeds in your bank account, this can lead to cash flow issues and a lack of liquid capital in the business. 

An iwoca business loan is the flexible way to bridge this cash flow gap, helping you to keep the business ticking over and trading successfully. 

By applying for an iwoca loan, you can: 

• Borrow from £1,000 to £1 million
• Get a decision within 24 hours
• Pay the loan back from 1 day to 60 months
• Incur no early repayment fees

Apply for an iwoca business loan.