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A guide to capital gains tax

A bit about capital gains tax and how does it affects you

For most business owners their ultimate goal will normally be to eventually sell some or all of their business for a handsome profit. Capital gains is the way in which HMRC tax you on the profit of this sale. So let’s look at this in a bit more detail.



Exactly what is capital gains tax and what does it apply to?

When an asset (e.g. a property, shares, a business etc) has increased in value since the time that you purchased it, the increase in value is called the “capital gain”. When you decide you would like to sell your asset, you are liable to pay capital gains tax on the capital gain you have made. Luckily there are a few main exceptions to this rule. You shouldn't normally have to pay capital gains tax on:

Selling your house
Selling your personal car or motorbike
Selling personal possessions up to the value of £6,000
Charitable donations
Things transferred between you and your spouse.

There are ways of reducing the amount of capital gains tax you need to pay, but we will talk about those a bit later.



How much is capital gains tax and how do I work it out?

At the moment, capital gains tax is 18% for lower rate payers (those earning less that £35,000) and 28% for higher rate payers (those earning over £35,000). However you are allowed to make capital gains of up to £10,600 per year before you will need to pay anything. Only your capital gains above £10,600 are liable to be taxed.

Example

You bought some shares in 1995 for £5,000.

You decide to sell them in July 2011 for £25,000

This means you have made a gain of £20,000 (£25,000 less £5,000)

You can deduct your tax free allowance of £10,600 from your gain, leaving you with a taxable gain of £9,400 (£20,000 less £10,600)

You earn £30,000 per annum, so you are liable to pay at the 18% rate on your capital gain of £9,400, leaving you a tax bill of £1,692 (£9,400 x 18%)

Note – this is a very simple example. It can get a lot more complicated than this so it’s always best to consult a professional



Is there any relief that I can claim against capital gains tax?

Yes, in some cases you can avoid paying or reduce the amount you are liable to on business assets:

Entrepreneur’s relief now stands at a generous £10 Million lifetime limit, so you will only have to pay at a rate of 10% on the first £10 Million you make.

There are a selection of other allowances available that can be seen on the HMRC website on capital gains tax.


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