02nd September 2023

Capital Gains Tax (CGT)

HOW CHANGES TO CAPITAL GAINS TAX COULD IMPACT YOUR PLANS TO SELL

The 2023 Spring Budget announced the reduction of the Capital Gains Tax (CGT) threshold, slashed from £12,300 to £6,000. So, what does this mean? It now means, you’ll be charged CGT on assets over £6,000 at a rate of 28% on gains from residential properties (this doesn’t include your main residence), whilst gains from other chargeable assets will incur a 20% charge.

If you’re a Basic Rate Income Tax payer, the exact percentage charged hinges on the size and type of gain, as well as your taxable income.

Looking ahead, even more stringent changes are on the horizon. The Government’s laid out plans to once again cut the CGT threshold in April 2024, lowering it to a mere £3,000.

Given this rapid and substantial reduction within a brief space of time, business owners contemplating disposing of their business should carefully consider the current climate – it might be an opportune moment to sell.

WHAT’S CAPITAL GAINS TAX?

When you make a profit through selling or disposing of an asset, you’ll be taxed on the gains made.

The gain is classed as the profit-only, not the total amount of money you received for the sale.

You can also deduct from the taxable gains of any costs associated with a disposal (and further purchases) such as legal and property agent fees.

CAPTAIL GAINS TAX FOR BUSINESSES

If you’re a self-employed sole trader or in a business partnership, you’ll pay CGT. Limited companies will pay chargeable gains through Corporation Tax.

Here are examples of chargeable business assets you’ll pay CGT on:

• Land & buildings
• Fixtures & fittings
• Plant & machinery
• Shares
• Registered Trademarks

HOWEVER, THE SALE OF BUSINESS ASSETS IS COMPLEX

There’s two sides to every business sale, and a successful disposal is inextricably tied to finding a buyer willing and able to pay the right price for your business, at the right time.

With many potential bumps in the road to navigate, it’s important to find the right buyer with a strategy closely aligned to your own. Putting the decision to sell on the backburner until the final hour can ultimately disrupt the chances of maximising on the sale value you could achieve.

Despite challenging marketing conditions which have come as a result of Brexit, the war in Ukraine and rising interest rates with borrowing costs currently at a 15 year high, the Mergers and Acquisitions (M&A) market’s remained active and buoyant in 1st H 2023.

Yes, we’re seeing transactions taking longer to complete – largely driven by purchasers and their funders being increasingly cautious in their approach – but the appetite to acquire’s still very much present.

Undoubtedly, the threat of further changes to CGT has accelerated the exit plans of many business owners.

WHAT TAX RELIEFS CAN I CLAIM?

You may be able to claim tax reliefs to reduce your CGT liability. However, each relief comes with a specific set of rules and criteria.

The CGT reliefs available include:

Business Asset Disposal Relief

Previously known as ‘Entrepreneurs’ Relief’, you’ll pay 10% instead of the standard rate on the gains, once ‘qualified losses’ and your tax-free allowance are deducted.

If you’re selling all or part of your business, you must’ve owned your business for at least two years, as well as be a sole trader or business partner to claim Business Asset Disposal Relief.

If you’re selling shares or securities, selling assets you lent to the business, or you’re a trustee, different eligibility criteria applies.

Business Asset Rollover Relief

Business Asset Rollover Relief allows you to delay payments of CGT if you use all or part of the proceeds to buy a new business asset.

This can also apply to assets you plan to buy but haven’t yet purchased, and if you use the proceeds to improve existing assets you own.

The Rollover Relief means you’ll not pay any tax until you sell the new asset. It’s worth noting you pay need to pay tax on the gain from the original asset after selling the new asset.

Incorporation Relief

Payments of CGT can be delayed through Incorporation Relief if you transfer your business in return for company shares.

This means you won’t pay tax until you sell or dispose of the shares.

To qualify, along with being a sole trader or in a business partnership, you must transfer your business and all its assets (except for cash) in return for shares in the company.

Gift Hold-Over Relief

You may be able to claim Gift Hold-Over Relief if you give away business assets or sell them for less than they’re worth to help the buyer.

Tax is not always payable on gifts to your spouse, civil partner or a charity, however check with your financial advisor.