What UK businesses need to know about Capital Gains Tax (CGT)

Capital gains tax (CGT) is a tax on profits made from the sale or disposal of qualifying assets. CGT events need to be reported to HMRC separately as the tax is not automatically deducted from annual returns.

Business owners need to understand the business tax rules for CGT, what it is, when it could apply to them, and how to comply with the rules and account for it as it is likely that you will need to sell or dispose of assets that will trigger a CGT event as your business grows.

It can apply to individuals when they dispose of assets such as buy-to-let property. It’s important to note that businesses don’t pay CGT. It will only apply to sole traders or those in a partnership, not businesses set up as a limited company who pay corporation tax on profits made from the disposal of business assets.

This is because there is no legal distinction between an individual and their business, so any capital gains made through the sale of shares for instance, are  the business owners’ or partners, so the gains will need to be included as part of the owners’ self-assessment tax return.

Why do you need to know about Capital Gains Tax?

The new Labour government recently made changes to CGT rates and allowances in its Autumn Budget. You need to know when CGT may impact your business, and how the budget announcement could affect things.

Those liable for CGT pay tax on the amount of profit they make, not the total sale value. For instance, if a sole trader bought a business premises for £300,000 and sold it for £415,000, the CGT liability payable would be the difference, so £115,000.

Disposing of an asset can mean gifting it, swapping it with someone else for another asset or receiving compensation for it, such as via an insurance payout. If you give away an asset or sell it for less than it’s worth, CGT is based on the market value of the asset at the time of its disposal.

What assets can trigger CGT?

You may be liable for CGT if you sell or dispose of chargeable assets including:

• Company shares
• Plant and machinery
• Registered trademarks
• Land and buildings
• Fixtures and fittings
• Cryptocurrency gains
• Your businesses’ reputation or ‘goodwill’

How does it affect businesses?

CGT applies to individuals who sell or dispose of fixed assets whilst operating within a company structure. Fixed assets have a longer life than a business’ current assets. They retain value so when they are sold or disposed of the profits could be liable for CGT.

Current assets are generally used up within a year and form part of the trading expenses of a business. If they are sold, they will be included as income in a company’s profit and loss account, with tax paid in the normal way.

Who is liable for CGT?

The budget also included CGT changes to the liability rules for UK resident, non-UK-domiciled individuals, and new arrivals who have non-UK assets or foreign income. 

Previously, the latter had the option to be taxed under the remittance basis and were subject to UK tax on their UK-sourced income and gains, but only had to pay UK tax on their foreign income and gains that are remitted to or used in the UK.

Under the new rules, qualifying new residents will not have to pay tax on their foreign income and gains for four tax years after becoming a tax resident here, regardless of whether or not these funds are brought to the UK.

When is CGT triggered?

Liability for CGT applies when an asset is sold or disposed of. If a sole trader makes the sale or disposal, they are liable for all tax due. For a business partnership, the tax levied on CGT profits from the sale or disposal will be apportioned as per the share each partner has in the partnership.

To understand whether an asset will be triggered for CGT, owners need to know what the asset was used for, as well as the amount it was sold for. For instance, virtually all main private residences are exempt and a private car sold by a sole trader is exempt if the car wasn’t used for business.

Several other types of assets are exempt from CGT when sold or disposed of, including:

• Gifts to a spouse or civil partner
• UK government gilts (bonds issued by the government) and premium bonds
• Gifts to a registered charity
• ISA investments
• Competition, betting, lottery, or pools winnings

2024 Autumn Budget update

In last month’s Autumn Budget, the government changed the individual CGT rate for the sale or disposal of all assets (except residential property).

The basic rate for the sale or disposal of all other assets increased from 30th October 2024 from 10% to 18%. The rate will remain at 18% for the 2025/26 tax year beginning on 6th April 2025.

The higher rate increased from 30th October 2024 from 20% to 24% and will remain at that level for the 2025/26 tax year.

CGT rates for qualifying residential property disposals remain the same at 18% for basic rate taxpayers, and 24% for higher rate taxpayers.

There are also changes to Business Asset Disposal Relief (BADR) from 10% to 14% for disposals made on or after 6 April 2025, and on Investors’ Relief (IR) from 14% to 18% for disposals made on or after 6 April 2026.

How do the new rules impact businesses?

Under the new rules, any business that sells a qualifying asset must compare the purchase price and sale income to see if a profit arose on the sale or disposal. Any costs of selling, valuing or advertising an asset for sale and the value of improvements made before selling can be offset.

Taxpayers must then pay CGT at the appropriate rate on the profit amount less their annual exemption allowance.

Changes to CGT rates for BADR could influence business owners who are considering selling their business. The increase in the CGT rate means it will cost more to sell a business from 30th October 2024. Before this date, businesses paid just 10% CGT on the first £1m of gains.

Find out more: what is classified as a qualifying asset for CGT?

Understanding CGT rates and allowances

Following the budget changes, the CGT rate for basic rate taxpayers is 18% from 30th October 2024 and for the 2025/26 tax year. The CGT rate for higher rate taxpayers is 24% for the same period.

What this means:

If a basic rate taxpayer makes a profit after allowable deductions of £8,000, they will pay 18% tax on that amount. So, £8,000 @ 18% = £1,440

If a higher rate taxpayer makes a gain of £12,000 after allowable deductions, they will pay 24% tax. So, £12,000 @ 24% = £2,880.

The rates for residential property gains have not changed. The rate for carried interest gains for both basic and higher rate taxpayers will change for 2025/26 from 18% and 28% respectively to 32% for both types.

Annual exempt amount

As CGT is not specifically a business tax, but a tax on individuals and their gains from the sale or disposal of business assets, individuals receive an annual allowance. This allowance remains at £3,000 for individuals. This means if a gain is made of £10,000, a further £3,000 can be deducted so CGT is levied on the lower amount, £7,000.

Business Asset Disposal Relief (BADR)

The other significant change for business owners is changes to the rate of BADR, formerly known as Entrepreneur’s Relief; a form of tax relief.

Business owners have a lifetime limit of £1m in BADR which they can claim over their lifetimes. Currently the rate they pay is 10% CGT on the first £1m of gains. The limit can be higher if any of the assets were held before March 2020, when the lifetime limit was reduced.

Business owners who have maxed out their limit or do not qualify will pay a higher rate from 2025/26 when the rate rises to 14% and then to 18% from 2026 to 2027, the same as the main basic rate for CGT.

The budget included transitional rules to deal with unconditional but uncompleted contracts entered into before 30th October 2024 but not completed by the time the CGT rate changes apply.

In cases involving BADR and IR, where a contract is made from 30th October 2024 to 5th April 2026, and completed from 6th April 2025, disposals will be subject to the new CGT rates in most cases with just two exceptions.

Key considerations for businesses

For SME owners considering an exit, the increase to BADR for the next two tax years is significant. If a buyer can be found, agree a deal and complete all the legal steps by 5th April 2025, sellers could benefit from the 10% rate. Again, it could incentivise others to sell before 5th April 2026, with BADR at 14% before the 18% rate is introduced.

For a business sold for a taxable gain of £2m, the tax liability would be £200,000 if sold in the 2024/25 tax year, but would increase by £80,000 to £280,000 if sold in May 2025, and again to £360,000 if sold in May 2026.

To qualify for BADR, the seller must have owned the business for at least two years up to the date on which the business is sold.

Share disposals

Another consideration for SMEs is share disposals. To sell shares in their own company, an individual must have been an employee, director or company secretary for at least two years and the company must have been actively trading (as opposed to being an investment company).

Selling shares can create a CGT liability. The same principle applies, in that CGT is applied to the profit on the sale of the shares. The rate applied will be either 18% or 24%, depending on whether the person is a basic or higher rate taxpayer.

Property disposals

As noted, CGT does not apply to the sale of an individual’s main residence, unless it’s let out, used for business or very large. It does apply to the sale of second homes and buy-to-let investment properties, business premises, land and inherited property, but the rates were not changed in the Autumn 2024 Budget.

If a CGT liability exists, it may qualify for tax relief if the property was a business asset. Taxpayers should report and pay any CGT on a property disposal within 60 days of the sale. The CGT rate will be 18% or 24% respectively for disposals made on or after 30th October 2024.

What do SMEs do now?

The Autumn Budget introduced changes to the CGT rates for basic and higher rate taxpayers. As of 30 October 2024, they now pay more CGT on profits when they sell or dispose of business assets.

Many business owners will be relieved that one potential measure considered did not materialise and the £1m lifetime BADR limit was not scrapped. There was an increase in both BADR and IR, up from 10% for each to 14% for 2025/26 and 18% for 2026/27.

Startups and small businesses need to keep updated on changes to CGT and understand the type of business transaction that can give rise to a CGT liability and how to conduct the transaction in a tax-efficient way.

As CGT can be a complex area, it is a good idea to seek professional expert advice from an accountant or tax specialist to ensure your business manages its CGT exposure in a compliant way.

Find out more: UK tax rates and personal allowances for 2024/25