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Capital gains tax – a guide for business owners and landlords

6-minute read

Young business owner reading from a laptop at home
Sam Bromley

Sam Bromley

6 December 2023

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When you sell something that’s increased in value, you may have to pay tax on the gain – this is capital gains tax.

You pay capital gains tax on different types of ‘assets’ when you dispose of them.

‘Disposing’ often refers to selling the asset, but it can include gifting, swapping, or getting compensation for it too.

In this article, you can read more about:

What is capital gains tax (CGT)?

If you own an asset that’s increased in value, you’ve made a ‘gain’. And when you dispose of the asset, HMRC sees the gain as taxable.

Bear in mind it’s the gain that’s taxed, not the total you get for the asset.

So, if you buy an antique for £6,000 and then sell it later for £20,000, you pay capital gains tax on the £14,000 gain.

When do you pay capital gains tax?

Capital gains tax applies when you dispose of different types of assets, including:

  • personal possessions worth £6,000 or more (for example, paintings and jewellery, but not your car)
  • property that’s not your main home
  • your main home, if you’ve been renting it out or using it for business
  • shares outside of individual savings accounts (ISAs) and personal equity plans (PEPs)
  • business assets (including land, plant and machinery, and shares)

There are different capital gains tax rates and allowances to keep in mind, which affect the overall amount you end up paying.

Who pays capital gains tax?

Any UK taxpayer could have to pay CGT if they sell something for a profit. Whether you have to pay capital gains tax and how much you need to pay depends on:

  • what you’re selling (some private possessions are exempt from CGT)
  • your tax band (basic rate, higher rate, or additional rate)

Some of the most common things people need to pay CGT on include second homes, businesses, or valuable possessions. As a result, business owners and landlords often have to pay CGT when they sell something.

What is the capital gains tax allowance?

The capital gains tax allowance is the maximum amount of profit you can earn from your capital gains without having to pay tax. To put it another way – you'll pay tax on profits that exceed your allowance.

Capital gains tax allowance 2023-24

You won’t have to pay tax on the first £6,000 of gains you make (or first £3,000 for trusts). You have to factor this figure in when working out how much capital gains tax you owe.

There are also different reliefs available, depending on the asset. We discuss the relevant ones for small business owners and landlords in some examples later on.

Changes to capital gains tax allowances

For the 2023-24 tax year, the tax-free allowance on capital gains was reduced from £12,000 to £6,000.

And from April 2024, for the 2024-25 tax year, the allowance is being halved again to £3,000.

Using your capital gains tax allowance

You don’t need to pay capital gains tax if your total gains fall within your £6,000 allowance.

If your gains are more than £6,000, you pay tax on the difference.

Remember that the rate you pay depends on your tax band. If you’re a higher or additional rate taxpayer, you pay the higher capital gains tax rates (20 per cent, or 28 per cent for property until 6 April 2024 when it drops to 24 per cent).

But if you’re a basic rate taxpayer, you have to work out whether your gains get pushed above the basic tax band. To do this:

  • work out your total taxable income, applying your income tax allowance and any reliefs
  • add your total gains (minus your capital gains tax allowance) to your total income
  • if the total is within the basic income tax band, you pay 10 per cent on gains above your allowance (18 per cent on residential property). You pay 20 per cent (28 per cent on residential property, dropping to 24 per cent on 6 April 2024) on gains above the basic tax band

You can see an example on the government website.

What are the capital gains tax rates?

Confusingly, capital gains tax rates differ depending on the income tax band you fall into (basic, higher, or additional rate). There are also different rates when you’re selling property.

Higher and additional rate taxpayers pay capital gains tax rates of:

  • 28 per cent on residential property (dropping to 24 per cent from 6 April 2024)
  • 20 per cent on other chargeable assets

These rates also apply to trustees or representatives of someone who’s died.

Broadly, the basic rates for capital gains tax are:

  • 18 per cent on residential property
  • 10 per cent on other chargeable assets

But the amount you actually pay depends on the size of your gain, because it could push you into higher rates.

There’s yet another rate for sole traders or partnerships whose gains qualify for Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief). This is a 10 per cent capital gains tax rate on selling all or part of a business.

How to pay capital gains tax

If you reported your capital gain as part of your Self Assessment tax return, you'll need to pay at the same time.

But if you reported your gain using HMRC's 'real time' capital gains tax service, you can pay HMRC online. There’s an extra charge if you pay with a corporate credit or debit card.

If you reported your capital gain using a Capital Gains Tax on UK Property account, you can sign in and pay through the portal. You can choose to pay with a credit or debit card, or you can approve a payment directly from your bank account. If you'd prefer to pay your capital gains tax by bank transfer or cheque, payment details can be found on the government website.

How to work out capital gains tax

Here are some relevant scenarios for how capital gains tax applies to businesses and landlords.

Capital gains tax on business assets

Sole traders and business partnerships pay capital gains tax when they sell all – or part of – a business asset.

Limited companies pay corporation tax on profits, including income from selling assets, so capital gains tax doesn’t apply.

The government website gives examples of business assets that capital gains tax applies to:

  • land and buildings
  • fixtures and fittings
  • plant and machinery (a digger, for instance)
  • shares
  • trademarks
  • goodwill, including your business’s reputation (HMRC sees this as quantifiable when you sell the business)

To work out your gain:

Calculate your gain: the difference between how much you paid for the asset and how much you sold it for. You can use the asset’s market value in some situations, for example if it was a gift, or you sold it for less than it’s worth to help the buyer.

Deduct costs: subtract certain costs related to the asset from the gain. These include fees for advertising the asset, money spent on improving the asset, and stamp duty land tax and VAT. There are some costs you can’t deduct, like interest on a loan, or costs you can claim as business expenses.

Consider tax reliefs: tax reliefs can reduce the amount of capital gains tax you need to pay. These include Entrepreneurs’ Relief, Incorporation Relief, Business Asset Rollover Relief, and Gift Hold-Over Relief.

Tax relief

What is it?

Who can use it?

Business Asset Disposal Relief

Reduced 10% rate on qualifying profits

Sole traders, business partners or those with shares in a ‘personal company’

Incorporation Relief

Delay paying CGT when transferring your business to a company

Those transferring a business in return for shares (you pay CGT when you sell shares)

Business Asset Rollover Relief

Delay paying CGT when disposing of assets you’ll replace

Buy the new asset within three year of disposing the last one, use old and new assets

Gift Hold-Over Relief

Pay no CGT if giving an asset to someone – they pay CGT when disposing

You need to have used the asset when trading

You can report gains in your Self Assessment tax return.

How much is capital gains tax on residential property?

You don’t pay capital gains tax on your main home, unless you’ve rented it out or used it for business.

So capital gains tax mainly applies to buy-to-let landlords, who invest in property to let it to tenants, then eventually sell.

How to work out capital gains tax on a second home

Here’s how you work out capital gains tax on a residential property:

Calculate your gain: the difference between how much you paid for the property and how much you sold it for. You might have to use the property’s market value in some scenarios, for example if it was a gift, you sold it for less than it’s worth to help the buyer, or you inherited it.

Deduct costs: subtract certain costs related to selling or improving the property from your gain. These can include estate agent and solicitor fees, as well as renovations like extensions (but not normal maintenance costs, like decorating).

Consider tax reliefs: if the property was a business asset, some of the business tax reliefs listed above may apply. Otherwise, you could get Private Residence Relief if the property was your main home, or a dependent relative lived in the property.

If you do have to report and pay capital gains tax, you’ll usually need to do this within 30 days of selling the property.

Capital gains tax calculator

The government website has a capital gains tax on property calculator that you can use to work out if you need to report and pay.

Do you have to pay capital gains tax on commercial property?

If you sell a commercial property for a profit, you’ll need to pay capital gains tax. However, there’s an exception if the property is held and sold through a limited company. In that case, you'll pay corporation tax rather than capital gains tax.

How much you’ll pay will depend on your tax band (10 per cent for basic rate taxpayers, 20 per cent for higher and additional rate taxpayers).

The CGT rate due on a commercial property is less than what you’d need to pay when selling a residential property.

As capital gains tax is complicated, please use this as a guide only and speak to a professional about your individual circumstances.

Is there anything in this guide you’d like to know more about? Let us know in the comments below.

Useful tax guides

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DC Studio/
Sam Bromley

Written by

Sam Bromley

Sam has more than 10 years of experience in writing for financial services. He specialises in illuminating complicated topics, from IR35 to ISAs, and identifying emerging trends that audiences want to know about. Sam spent five years at Simply Business, where he was Senior Copywriter.

We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer

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