While Capital Gains Tax (CGT) sounds pretty obvious, it can often catch out some business owners, particularly sole traders.
CGT is levied on profits made by individuals and trusts from the sale of assets. This is seen as a ‘gain’. According to the Office for Budget Responsibility, CGT will raise £15 billion in the 2022-2023 financial year, so it’s a real revenue earner for the government.
Gains made by limited companies are not subject to CGT as they pay Corporation Tax, which is explained here.
What you need to know about Capital Gains Tax
Understanding how CGT works will help you become aware of when you might need to put money aside for a tax bill. As we’ve mentioned, CGT is a tax on any assets you sell at a profit. These can include:
- Stocks and shares
- Antiques
- Second properties
- Cryptocurrency
CGT rates differ depending on what kind of asset you are selling and your income. Here is the basic formula:
| Type of asset | Basic rate payer (income less than £50,270) | Higher rate payer (income more than £50,270) |
Shares | 10% | 20% |
Residential property | 18% | 28% |
Cryptocurrency | 10% | 20% |
Other | 10% | 20% |
When you owe Capital Gains Tax
When selling an asset, you owe CGT if the profit is over £12,300. Anything less than that attracts no tax. When earning more than £12,300 from the sale of an asset during a tax year, you need to declare it to HMRC and file a tax return.
This must be done by 31 January the tax year after your profit. Remember, this is not a calendar year but the tax year, which runs from the 6 April to 5 April the following year.
Where you share an asset with another person, such as your spouse, you can apply both allowances. That means CGT isn’t applicable until you make £24,600. You are allowed to transfer assets between partners in a marriage or civil partnership to reduce your CGT liability.
For trusts, the CGT is paid on profits over £6,150.
What about business assets?
As we have mentioned, limited companies pay Corporation Tax. But if you are a sole trader or in a partnership, then you may need to pay CGT if you sell part or all of a business asset. This includes:
- Plant and machinery
- Trademarks
- Shares
- Land and buildings
- Fixtures and fittings
Calculating how much CGT is fairly simple. Work out the difference between the amount you paid for the asset and how much you sold it for. Sounds simple! But remember to also subtract any costs related to the asset from the gain.
This includes VAT, fees for advertising the asset and any money spent on improving the asset.
Some tax reliefs can also be applied to reduce the amount of CGT you owe, too.
Deduct losses
One of the most important things to remember is that CGT is charged on total gains in a tax year. So, it’s important that you deduct any losses you made from the gain before working out how much tax you owe.
You can carry forward any losses that haven’t been used. Even if you don’t owe any CGT, it is important to submit details of any losses to make it easier to offset them against gains in future years.
Need more information?
While CGT sounds simple, we have shown that there are legitimate ways to reduce your bill. As ever with tax, speaking to an expert is essential. If you need more help, then fill in the form below and one of our experienced team will be in touch. Or you can contact us here.
