Understanding Capital Gains Tax Allowance in the UK

What is Capital Gains Tax (CGT) allowance in the UK?

Capital Gains Tax (CGT) is a tax on the profit you make when you sell or dispose of certain assets, such as property, shares, or business interests, that have increased in value since you acquired them. Importantly, CGT is charged only on the “gain” – the amount the asset has appreciated – rather than the total amount you sell it for.

CGT allowance for 2023/2024

The UK government provides individuals with a CGT allowance, which is the amount of gain you can make before paying any tax. For the 2023/2024 tax year, the CGT allowance is £6,000. This means if your total gains for the year are below this threshold, you won’t have to pay any CGT.

If your gains exceed this amount, you’ll only pay tax on the profit above the allowance. Different rates apply depending on whether you’re a basic-rate or higher-rate taxpayer and the type of asset involved, such as residential property versus other assets like shares.

What are the 3 conditions for granting capital allowances?

While CGT applies to gains made on the sale of assets, capital allowances are tax reliefs available for businesses investing in qualifying assets, such as machinery, vehicles, or business equipment. To benefit from capital allowances, you must meet three key conditions:

You must own the asset

Capital allowances are only granted for assets owned by the business or the taxpayer. Leased or rented equipment typically does not qualify.

The asset must qualify

Not all assets are eligible for capital allowances. For instance, plant and machinery, integral fixtures in buildings, and certain business vehicles often qualify, but assets used purely for personal use or long-term investment don’t.

The asset must be used for business purposes

The equipment must be actively used in the business to be eligible for capital allowances. For example, a van used to deliver products or machinery used in production qualifies, whereas assets for personal use or investment don’t.

Understanding these conditions can help businesses reduce their tax liabilities by claiming the appropriate allowances.

How does Capital Gains Tax affect businesses?

Capital Gains Tax (CGT) doesn’t only apply to individuals—it can also affect businesses when they sell or dispose of business assets. Whether you’re a sole trader, a partnership, or a company, CGT can come into play when certain types of assets, such as property, equipment, or shares, increase in value and are sold for a profit.

Here are some key ways CGT can impact businesses:

Business Asset Disposal Relief (Formerly Entrepreneurs’ Relief)

One of the most significant forms of relief for businesses dealing with CGT is Business Asset Disposal Relief (BADR), previously known as Entrepreneurs’ Relief. This relief allows business owners to pay a reduced CGT rate of 10% on qualifying gains, compared to the standard rates of 10% or 20%.

BADR is available when:

• You sell all or part of your business.
• You dispose of shares in a company in which you own at least 5%.
• You sell assets used in your business within three years of ceasing to trade.
• The relief has a lifetime limit of £1 million, meaning you can claim the reduced tax rate on total qualifying gains up to that amount over your lifetime.

Selling Business Assets

When a business disposes of assets like machinery, property, or intellectual property, any gains made could be subject to CGT. However, businesses often have other allowances and reliefs that can mitigate this tax:

Roll-over Relief

This allows businesses to delay paying CGT if the proceeds from selling a business asset are reinvested into new qualifying assets. This is particularly useful for businesses looking to upgrade or expand, as it allows you to reinvest profits without immediately triggering a CGT liability.

Incorporation Relief

If a sole trader or partnership incorporates their business (transfers it to a limited company), this relief allows them to defer CGT on the gains made from transferring assets to the new company. Instead, the tax is deferred until the shares in the company are sold in the future.

Corporate Capital Gains

For limited companies, capital gains are treated differently from individuals. Rather than paying CGT, companies pay Corporation Tax on their gains. As of 2023, the standard Corporation Tax rate is 25% for profits over £250,000, but this rate may vary depending on a company’s profit levels. For smaller businesses, profits up to £50,000 are taxed at 19%.

To calculate the gain, a company deducts the original cost of the asset from the sale proceeds, just as an individual would for CGT purposes. However, companies also benefit from indexation relief, which adjusts the original cost of an asset for inflation, potentially reducing the taxable gain. Indexation relief has been frozen for assets bought after 2017, but it still applies for assets acquired before then.

Impact on Shareholders

If you’re a shareholder in a business, selling your shares can result in a capital gain that may be subject to CGT. Business Asset Disposal Relief may apply, reducing the CGT rate to 10% on gains made from selling shares in a trading company, provided you meet the qualifying conditions.

For example, if you’re a director and own 10% of a business and decide to sell your shares, any profit made on the sale could be subject to CGT. Understanding the timing of your sale, as well as available reliefs, can help minimise the tax burden.

Planning for CGT in Business

Businesses should be proactive when it comes to CGT, especially if they frequently buy and sell assets or are planning for significant transactions like selling the business itself. Some strategies include:

Maximising capital allowances: These can help reduce the taxable value of assets over time, thus reducing overall gains when the asset is sold.

Claiming Business Asset Disposal Relief: Ensure that qualifying conditions are met to take advantage of this lower CGT rate.

Using roll-over relief: This is helpful if you plan to reinvest profits in new business assets, allowing you to defer tax payments.

Working with a tax advisor: As CGT can become complex with multiple reliefs and exemptions available, it’s wise to consult with a tax professional who can help structure asset sales in the most tax-efficient way.

What is the Annual Investment Allowance (AIA)?

The Annual Investment Allowance (AIA) is a key benefit for businesses, allowing them to claim 100% of the cost of qualifying assets in the year they are purchased. This provides immediate relief, helping to lower taxable profits for that year.

For the tax year 2023, the AIA is set at £1,000,000. This generous allowance is aimed at helping businesses invest in equipment, plant, and machinery. If your business purchases assets within this limit, you can claim the full cost as a deduction in the same tax year, without waiting to spread the costs over future years.

For example, if you buy £500,000 worth of machinery, you can deduct the entire amount from your taxable profits in that year, which can have a significant impact on your tax liability.

How many years can capital allowance be carried forward?

What happens if your business has more capital allowances than it can use in a given year? Fortunately, you can carry forward unused capital allowances to future years.

For instance, if your business doesn’t make enough profit to use up all its allowances in a single year, you can roll them over to offset profits in the next year. This means your business won’t lose out on tax relief just because of a low-profit year.

There’s no set time limit for how long you can carry forward these allowances, allowing you to take advantage of them when your profits rise in future tax years.

Other relevant points on Capital Gains Tax

There are a few additional points to consider when managing your Capital Gains Tax liabilities:

When is CGT payable? After disposing of an asset, you need to report and pay CGT by 31 January of the following tax year. For residential property, you must report and pay CGT within 60 days of the sale.

Exemptions from CGT

Certain assets are exempt from CGT, such as personal cars, ISAs, and the sale of your main home (known as Private Residence Relief). Make sure to check whether the asset you’re selling is fully or partially exempt.

CGT for married couples and civil partners

Assets transferred between spouses and civil partners are exempt from CGT, allowing couples to use both of their allowances to reduce their overall tax bill.

Tax planning tips

Timing the sale of assets and gifting to family members are common strategies to minimise CGT. For example, gifting assets gradually over several tax years can help you spread the gains and make better use of annual allowances.

Capital Gains Tax is an important part of the UK tax system that can impact anyone selling or disposing of valuable assets. By understanding CGT allowances, when you might need to pay, and the reliefs available, you can significantly reduce your tax liability. With potential changes on the horizon in the 2024 budget, it’s more important than ever to stay informed and plan ahead.

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*Disclaimer – This blog has been created as general information and should not be taken as advice. Make sure you have the correct level of insurance for your requirements and always review policy documentation. Information is factually accurate at the time of publishing but may have become out of date.