Capital Gains Tax

If you are in business as a self-employed sole trader or as part of a partnership, then you will be liable to pay Capital Gains Tax (CGT) if you make a profit selling all or part of a business asset. CGT is normally charged at a flat rate of 20%. However, there are various reliefs available that can reduce the amount of CGT you are required to pay.

We have listed below the main CGT tax reliefs for businesses:

Entrepreneurs' Relief – Where this relief is available, you will pay CGT of 10% in place of the standard rate. There are a number of qualifying conditions that must be met in order to qualify for this relief.

Business Asset Rollover Relief – This is a valuable relief that allows you to defer payment of CGT on gains made when you sell or dispose of certain assets and use all or part of the proceeds to buy new assets. The relief means that the tax on the gain of the old asset is postponed. The amount of the gain is effectively rolled over into the cost of the new asset and any CGT liability is deferred until the new asset is sold.

Incorporation Relief – A capital gain will be deemed to arise if your business is converted into a company. The computation of any taxable gain will be made by reference to the market value of the business assets including goodwill. The incorporation relief means that you can delay the payment of CGT when you transfer your business in this way to a company.

Gift Hold-Over Relief – This relief can help when you give away assets or sell them for less than their full value. The relief means that any gain on the asset is 'Held-Over' until the recipient of the gift sells or disposes of the asset. Your gifting of the asset is not subject to CGT as the person you gave it to will pay tax when they sell it.

Planning note

It is important to remember that CGT is not payable by limited companies or unincorporated associations when they sell an asset and make a gain. Instead, the gain (less any allowable costs and reliefs) is subject to Corporation Tax.

Please call if you need to clarify the impact of any future sales that will incur a CGT charge.

Gift Hold-Over Relief is effectively a deferral of Capital Gains Tax (CGT) when assets are given away (including certain shares) or sold for less than they’re worth to help the buyer. The relief means that any gain on the asset is 'Held-Over' until the recipient of the gift sells or disposes of them.

The person gifting a qualifying asset is not subject to CGT on the gift. However, CGT may be payable where the asset is sold for less than it’s worth. Gifts between spouses and civil partners don’t trigger capital gains. A claim for the relief must be made jointly with the person to whom the gift was made.

If you are giving away business assets then you must:

• be a sole trader or business partner, or have at least 5% of voting rights in a company (known as your 'personal company')
• use the assets in your business or personal company

You can usually get partial relief if you used the assets only partly for your business.

If you are giving away shares, then the shares must be in a company that's either:

• not listed on any recognised stock exchange
• your personal company

The company's main activities must be in trading, for example providing goods or services, rather than non-trading activities like investment.

A number of significant changes to the way Capital Gains Tax (CGT) is reported and paid come into effect from April 2020.  Currently, the usual due date for paying any CGT owed to HMRC on property disposals is the 31 January following the end of the tax year in which a capital gain was made. From 6 April 2020, any CGT due on the sale of a residential property by a UK resident will need to be reported and paid within 30 days of the completion of the sale transaction.

This change will apply to the sale of residential property that does not qualify for Private Residence Relief (PRR). The new rules will mainly apply if you are selling a buy-to-let property or a second / holiday home. The rules will also apply on the sale of any other residential property that does not qualify or only partially qualifies for PRR.

There are further changes to the PRR rules which will see the final exempt period for CGT purposes being reduced from 18 months to 9 months from April 2020. This relief applies even if you were not living in the property when it was sold. The time period can be extended to 36 months under certain limited circumstances such as if the property owner is disabled or has to move into care.

Finally, if you let all or part of your main residence, you can usually benefit from letting relief of up to £40,000 (£80,000 for a couple). From April 2020, lettings relief will be reformed. This change means that lettings relief will only be available if you continue to live in the property whilst letting a part of your home.

If you are likely to be affected by these changes and are considering selling an affected property in the near future, it may be worth considering a sale prior to 6 April 2020.

For example, if you sell a property at the end of March 2020, any CGT will be due on 31 January 2021 whereas if you sell the property on 6 April 2020, the CGT will be due 30 days later. There will also be the issue of interest and penalties if any CGT due is not paid on time.

Partnerships are treated as transparent for Capital Gains Tax (CGT). This means that each partner is responsible for their share of any capital gains arising on the disposal of their interests in the assets of the partnership. Each partner is treated as owning a fractional interest in each of the assets of the partnership.

It is important to be aware of the rules where partnership assets are distributed in kind to one or more partners. This type of distribution can occur, for example, by a distribution when a partnership is dissolved. Any partners to whom the asset was not distributed will be treated as having disposed of their fractional interests in the asset at the time of the distribution. These partners will be taxed on their fractional interest of the gain based on market value.

The partner to whom the asset was distributed will not be treated as having made a disposal at the time of the distribution. In fact, his or her interest in the asset will have increased. Their CGT base cost on a future disposal of the asset will be determined by reference to its market value at the time of the distribution as reduced by the amount of the notional gain arising on their fractional interest at that time.

The meaning of goodwill for CGT purposes is complex. The term 'goodwill' is rarely mentioned in legislation and there is no definition of 'goodwill' for the purposes of Capital Gains legislation.

In fact, most definitions of goodwill are derived from case law. At its simplest you could describe goodwill as the 'extra' value of a business over and above its tangible assets.

In the vast majority of cases when a business is sold a significant proportion of the sale price will be for the intangible assets or goodwill of the company. This is essentially a way of putting a monetary value on the business's reputation and customer relationships. Valuing goodwill is complex and there are many different methods which are used and that vary from industry to industry.

HMRC’s internal manual states that:

'Most businesses can be expected to have goodwill even though its value is likely to fluctuate from time to time. The fact that goodwill may not be reflected in the balance sheet of a business does not mean that it does not exist. In the same way, the writing off of purchased goodwill in the accounts of a business does not mean that its value has decreased or that it has ceased to exist.'

A negligible value claim is a claim made by a taxpayer when an asset they own has become of negligible value, i.e. it is worthless or worth next to nothing. The taxpayer effectively treats the asset as having been disposed of and then immediately reacquired at the negligible value. The asset must still be owned by the person making the claim and must have become of negligible value whilst it was owned.

Making a claim allows the owner of the asset to realise a capital loss in respect of an asset without actually having to dispose of it.

By making a negligible value claim, rather than selling an asset, the taxpayer retains ownership and may benefit should the asset ever recover in value; even if this is only a remote possibility.

HMRC publishes a list of shares or securities, formerly quoted on the London Stock Exchange, that have been officially declared of negligible value for the purposes of making a claim. In other cases, an application should be made to HMRC to agree a valuation.

A negligible value claim can be back-dated to an earlier time falling in the previous two tax years provided all the other qualifying conditions are met.

Entrepreneurs' Relief (ER) can be valuable relief when selling your business, your shares in a trading company or your interest in a trading partnership. Where ER is available, Capital Gains Tax (CGT) of 10% is payable. This rate applies to qualifying lifetime gains of up to £10 million.

However, it is important to remember that there are qualifying conditions that must be met to ensure you are eligible to benefit from the lower 10% rate.

If you are selling all or part of your business, then both of the following must apply in order to qualify for relief:

1. You must be a sole trader or business partner,
2. You must have owned the business for at least 2 years before the date you sell it.

If you are selling shares in the business you must be an office holder or employee of the company, own at least 5% of the company and have at least 5% of the voting rights for at least 2 years before you sell your shares. You must also be entitled to at least 5% of either the profits that are available for distribution and assets on winding up the company or the disposal proceeds if the company is sold.

The company must also be a trading company or the holding company of a trading group. If the number of shares you hold falls below 5%, because the company has issued more shares, you may still be able to claim ER. The rules are different if your shares came from certain Enterprise Management Incentive (EMI) schemes.

There is also a sister relief called Investor’s Relief which has a separate £10 million lifetime cap. This is useful for investors who do not meet the officer or employee requirement for ER.

If you own a business as a sole trader or in partnership, a Capital Gain will arise if your business is transferred into a company structure. The gain will be assessed by reference to the market value of the business assets, including goodwill, at the date of transfer. This could give rise to a chargeable gain based broadly on the difference between the market value of the assets and their original cost.

In most cases, the incorporation of the business will be completed so that incorporation relief can be claimed. The claim for incorporation relief should defer any tax until you sell your shares in the business.

In order to qualify for incorporation relief, all your business assets other than cash must be transferred as a going concern, wholly or partly in exchange for shares in the new company.

It is important to note that where the necessary conditions are met, incorporation relief is given automatically and there is no need to make a claim. The relief works by reducing the base cost of the new assets by a proportion of the gain arising from the disposal of the old assets.

Although the relief is automatic, it is possible to make an election in writing for incorporation relief not to apply. An election must be made before the second anniversary of 31 January next, following the tax year in which the transfer took place e.g. an election in respect of a transfer made in the current 2019-20 tax year must be made by 31 January 2023. The election deadline is reduced by one year if the shares are disposed of in the year following that in which the business was incorporated.

Planning note

Incorporation Relief is just one possible strategy that can be used to minimise tax liabilities if you incorporate your business. However, there are other planning options. If you are considering incorporation, be sure to take professional advice. We can help. 

There is usually no Capital Gains Tax (CGT) to be paid on the transfer of assets to a spouse or civil partner. There is, however, still a disposal that has taken place for CGT purposes effectively at no gain or loss on the date of the transfer. When the asset ultimately comes to be sold, the gain or loss will be calculated from when the asset was first owned by the original spouse or civil partner.

There are a few exceptions that couples should be aware of where the relief does not apply.

This mainly relates to the use of goods which are sold on by the transferee’s business and for couples that were separated and not living together for the entire tax year, when the assets were transferred. Spouses or civil partners that lived together at any point in the tax year when the assets were transferred can still benefit from these rules. If a transfer did not qualify then the asset must be retrospectively valued at the date of the transfer and the transferor is liable for any gain or loss.

There are similar rules for assets that are gifted to charities. However, CGT may be due where an asset is sold to a charity for more than its cost and less than the market value. The gain in this case would be calculated based on what the charity paid rather than the market value of the asset.

One of the most often used and valuable of the Capital Gains Tax (CGT) exemptions is Private Residence Relief, which usually exempts any profit made on the sale of a family home.

Consequently, there is no CGT on a property disposal that has been used solely as the main family residence. An investment property, which has never been used as a family residence, will not qualify for PRR.

However, an interesting counter point occurs if and when you make a loss on the sale of your home. You will not be entitled to any CGT loss relief as you would have qualified for PRR if the property was sold at a profit. 

Other planning points

If you would have qualified for partial relief, part of your loss will not be allowable, and that part should be calculated in the same way as you would have calculated the partial relief if you had made a gain.

The sale of a second home such as a holiday home or a property, that was bought as an investment and rented out either in the UK or overseas, may be subject to CGT. Conversely, any loss incurred on the sale of such a property is likely to be an allowable loss and can be used to reduce any taxable gains subject to CGT.

If you are contemplating the sale of a property that has had mixed use as your home and let for periods of time, please call if you need help estimating any CGT that may be payable.