When you sell any business asset such as property, shares or even a work of art, you will be may need to pay capital gains tax on the profit you make if you are a sole trader or the business is a partnership. There are, however, some exemptions and business structures that should help reduce your liability.
Individuals, including sole traders and those in business partnerships, have an annual capital gains tax allowance of £12,300 in the 2022/2023 tax year. This means that gains made on the sale of assets up to £12,300 are not subject to capital gains tax.
The key to minimising your liability for paying capital gains tax is to make a clear valuation of the property or asset and accurately work out the gain you have made since purchasing it. You can also offset things like the cost of valuations and advertising for selling the business asset.
Business Asset Disposal Relief means that you pay capital gains tax at 10% on gains made on the sale of certain assets, such as plant and machinery. It can be applied if you are selling a property as part of the sale of your business. The relief is available to businesses that have owned and used the assets for at least two years.
Holding Period Relief reduces the amount of tax that is payable on gains made on the sale of assets that have been held for more than three years. This means that you reduce CTG from 20% to 10%.
Here we take a look at capital gains tax and how this in particular, applies to selling business property.
What is Capital Gains Tax (CGT)?
Capital gains tax (CGT) is a tax on the profit made when you sell an asset that has increased in value. It is calculated as the difference between the sale price and the original purchase price of the asset.
In the UK, CGT is charged at a rate of 10% or 20%, depending on the length of time you have owned the asset. For assets held for less than three years, the rate is 20%. For assets held for more than three years, the rate is 10%.
CGT is only paid by sole traders or partnerships. It is not paid by a limited company.
What is capital gain?
You need to inform HMRC when you sell a business asset and are liable for capital gains tax. The first thing you need to do is work out how much the asset has gained in value since you purchased it.
If this is over the tax relief threshold, then you will need to pay CTG at either 10 or 20%.
What factors usually determine CGT liability on property?
The longer the business property has been owned, the lower the CGT rate that will be applied. For assets held for less than three years, the rate is 20%. For assets held for more than three years, the rate is 10%.
The amount of the gain is calculated as the difference between the sale price and the original purchase price of the business property. The higher the gain, the more CGT that will be payable.
Individuals have an annual capital gains tax allowance of £12,300 in the 2022/2023 tax year. If the asset is owned by the business, however, this does not apply.
Why do you have to pay CGT on property?
With any business, you pay income tax on the profits that you make. If you sell a business property, for example a shop or office or even land, for more than you purchased it, this is counted as profit or gain for that asset. In most cases, you will need to pay CTG.
The UK government has an online tool that you can use to calculate the capital gains tax on a property.
How to reduce capital gains tax liability when selling property?
There are several different ways you can reduce your capital gains tax liability if you are intending to sell a property.
You could transfer the property to your spouse in order to take advantage of their capital gains tax allowance. You need to make sure that you record any losses that might be associated with the property – this can include significant improvements to the property but does not include superficial ones such as decorating.
You can add on incidental fees involved in the selling of the property such as valuations and advertising fees. You can also include stamp duty and VAT (if you are not claiming it back).
Are there exemptions to CGT?
There are few exemptions from capital gains tax but the following may be applicable depending on the nature of the property sale and the type of business you run.
Business Asset Rollover Relief
This relief allows you to defer CGT on gains from the sale of business assets if you reinvest the proceeds into new business assets within 12 months.
Gift Holdover Relief
This lets you defer CGT on gains from the sale of business assets if you gift the assets to someone else within 12 months.
This lets you defer CGT on gains from the sale of assets to a company if you incorporate your business within 12 months.
The team VW Taxation are experts in tax
Paying capital gains tax relating to your business assets can be challenging. It’s important to note that you have an obligation to inform HMRC that you have sold property and calculated a gain that you are liable for.
Working with an experienced accountant not only ensures that you minimise your income tax liability but can help with issues that may arise concerning capital gains tax. At VW Taxation, you get access to the expertise you need at the right time, whether you’re a limited company, a sole trader or a subcontractor.
Want to find out more? Contact us today.
There are various business assets that are subject to capital gains tax, including property, land and machinery. You only pay CGT if you are self-employed or part of a partnership. Limited companies don’t pay capital gains tax.
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