Whilst most business owners will be familiar with Capital Gains Tax and what that means for you personally, we’ll start with a simple definition of exactly what it is for clarity;
Capital Gains Tax
Put simply, Capital Gains Tax is a tax on any gains or profits made when you sell or ‘dispose’ of an asset. This not only applies to the sale of the business itself, but may also apply to any vehicles, premises, furniture and potentially even any goodwill the company has managed to build up.
In short, it seems almost anything and everything can come under the Capital Gains Tax remit. Shares purchased and sold on at a profit will be taxable as will personal possessions such as watches or jewellery that exceed a certain amount in value, for example.
For any business owner, Capital Gains Tax can be a complex issue but it’s important to remember it’s only the profit gain you are taxed on and not the sum received for the asset.
Calculating your Capital Gains Tax
Figuring out how much Capital Gains Tax you’ll likely have to pay is actually a relatively simple process. You can do this by ascertaining exactly how much profit you have made from the sales of any assets during the tax year to give you an overall net profit. If that figure subsequently falls short of the annual tax free allowance (sometimes referred to as the Annual Exempt Amount), then you won’t be eligible to pay Capital Gains Tax on your profits. For 2017/18, the Annual Exempt Amount for individuals is £11,300.
If however you do find your net gains exceeding that figure, you have the option of deducting any unused losses from a previous tax year to bring yourself in line with the Annual Exempt Amount.
If once you have looked at all these options your gains are still greater than the Annual Exempt Amount, Capital Gains Tax is unavoidable and will need to be paid.
Rates and Tariffs
• If your combined income and taxable gain exceeds the highest band of the basic rate of income tax (presently £33,501), you will be liable to pay 28%
• If your net gain is greater than £11,300, your Capital Gains Tax is based upon a flat rate at either 18% or 28%, depending on the total amount of your taxable income
• If your combined income and taxable gain fall short of the highest band of the basic rate of income tax, you will be taxed 18%
• Finally, if you are a business owner, you may qualify for Entrepreneur’s Relief which carries a reduced Capital Gains Tax tariff of 10%
Entrepreneur’s Relief
In order to be eligible for Entrepreneur’s relief, you must firstly be an individual as opposed to a company, work as an employee or officer of the company and have owned a minimum of 5% of the company or have had voting rights for at least 12 months.
The initiative also restricts you to a ‘lifetime allowance’ of £10 million, meaning you will only be entitled to Entrepreneur’s relief on the first £10 million you make, anything on top of this renders you ineligible.
Paying your Capital Gains Tax
If you are eligible to pay Capital Gains Tax you will need to notify the HMRC by completing a self-assessment tax return, ensuring you are registered for self-assessment before doing so.
The deadline for self-assessment registration is October 5th, so be sure to have your affairs in order and be registered prior to his date to avoid paying a penalty for not declaring that you have Capital Gains Tax to pay in adequate time.
For those that regularly complete self-assessment tax returns online, the Capital Gains Tax sections can be found at the start of the self-assessment form. Similarly, those that provide a paper copy can locate the Capital Gains Tax pages on the HMRC government website.
The self-assessment tax form requires you to separately detail each gain and loss for the tax year and every instance of profit or loss should be included, regardless of how big or small. When completing the form, ensure you state the following information on each instance:
1. A succinct description of each asset i.e make, model, age, quantity etc
2. The amount the asset was purchased for or the market value if the asset was inherited or gifted
3. The date the asset was acquired and also sold
4. The total amount the asset was sold for
5. Details of any relief you are receiving
Are any assets not liable for Capital Gains Tax?
There are some circumstances where you will not have to pay Capital Gains Tax on your assets, such as your main home, your car or any personal possessions disposed of for £6000 or less.
Capital Gains Tax can also be avoided by transferring assets to your husband or wife (although be aware any gifts bequeathed to your children will be eligible for taxation). Equally, any money you receive from government bonds, pensions or ISA’s is also exempt.
You can also look to reduce your Capital Gains Tax bill by making a negligible loss here and there. If you have shares that are performing badly or a property or two that you are finding difficult to sell, you can potentially achieve an overall gain by selling at a lower rate and effectively reducing your tax liability.
As with all taxes, Capital Gains Tax can be unavoidable and costly if you don’t account for it in your budget. Be sure to keep records of all purchases and sales and the gains you have made on each, failure to do so could land you with a hefty fine.
For more information, visit the government website at www.gov.uk/capital-gains-tax/overview.
If you need any advice or further information on making a business acquisition or indeed selling your own business, feel free to give us a call on 0845 337 3327 to speak to one of our consultants.
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