Personal and business capital gains are treated differently, depending on whether you are self-employed (as a sole trader or in a partnership) or trade as a limited company
Personal capital gains (eg on privately owned shares) and business gains made by the self-employed are dealt with through capital gains tax (CGT) while capital gains made by a company are subject to corporation tax as chargeable gains.
While business capital gains can add to your tax liabilities, capital gains can also provide an important tax planning opportunity for business owners. Business CGT attracts important reliefs - particularly when you sell your business - and is taxed less heavily than income.
Personal and business capital gains tax basics
CGT may apply whenever you dispose of an asset, for example, by selling it or giving it away. CGT does not generally apply when you give assets to your spouse, civil partner or a charity.
Some personal possessions are not liable for CGT. These include your car, personal possessions worth less than £6,000 and various tax-free investments (eg ISAs). There is usually a CGT exemption on gains made on the disposal of up to £50,000 worth of shares held by an employee shareholder. Although property (land and buildings) is liable to CGT, private residence relief usually means there is no CGT when you sell your only or main home. Gains on the sale of a residential property that has not been your main home (eg a holiday home or buy-to-let property) must be reported to HMRC and any CGT paid within 30 days from 6 April 2020.
All business capital gains - when you dispose of a business asset - are subject to CGT (for unincorporated businesses). This can include personal assets used in your business, for example, if you run your business from home.
There is no CGT to pay if your total personal and business capital gains are within the annual CGT tax-free allowance of £12,300 and the total value of assets disposed of is within four times this amount. Any losses you have made disposing of assets liable to CGT can be set against gains when working out your total capital gains. For most trustees, the Annual Exemption Limits are reduced to £6,150.
Above this level, personal and business capital gains must be reported on additional CGT pages in your self-assessment tax return. CGT is normally payable at 10% if your income is within the basic rate tax band or 20% otherwise (18% and 28% for residential properties). Prior to 2016/17, all CGT was payable at 18% and 28%.
Business capital gains planning
Capital gains tax planning can offer worthwhile tax savings. Simple CGT planning opportunities can include making use of your spouse’s CGT allowance and selling loss-making assets to offset against gains if you have exceeded the CGT allowance. You should also make sure you are deducting any allowable costs of buying, improving or selling an asset when you work out the capital gain.
Creating business capital gains - rather than taking high levels of income - can be highly tax-efficient. When you sell your business, capital gains can qualify for a tax rate of just 10% if Entrepreneurs’ relief applies. Individuals disposing of all or part of their business after 6 April 2019 are required to meet conditions for a minimum period of two years to qualify for Entrepreneurs Relief. If you transfer your business to a limited company in return for shares you can delay paying CGT.
Reinvesting proceeds in business assets within three years of the sale of business assets may enable you to claim business asset roll-over relief. This delays the CGT until the new asset is sold.
Other business capital gains tax planning opportunities can include spreading business capital gains over several years (to make use of annual exemptions) and holding business assets that grow in value within your pension fund (where CGT will not apply).
Personal and business capital gains tax planning can be complicated. You may want to take advice as part of your overall tax planning.