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What is Capital Gains Tax?

What is Capital Gains Tax?


In the United Kingdom, Capital Gains Tax is a tax on the profit you make when you sell or dispose of a capital asset, such as property, shares, or a second home. The amount of Capital Gains Tax you have to pay depends on your total taxable income and the gain made from the sale of the asset, as well as your individual tax rate.


For the 2022-2023 tax year, the basic rate for Capital Gains Tax is 10%, and the higher rate is 20%. Residential property is taxed at a slightly higher rate of 18% for basic rate tax payers and 28% for higher rate taxpayers. However, there are various exemptions and allowances, such as the Annual Exempt Amount, which allows you to make a certain amount of gains each year tax-free.


What are the Capital Gains Tax allowances?


The current capital gains tax (CGT) allowance in the United Kingdom is £12,300 per tax year for individuals. This means that you can make gains up to this amount in a given tax year before being subject to CGT. If your total taxable gains exceed the allowance, you will need to pay CGT on the excess amount at either 10% (for basic rate taxpayers) or 20% (for higher rate taxpayers), depending on your total income and taxable gains for the year.


It's important to note that some assets may be exempt from CGT or eligible for special treatment, such as your main residence, so you should always seek professional advice if you are unsure about your tax liability.


What taxes apply when selling a business?


When selling a business in the UK, the proceeds from the sale may be subject to capital gains tax (CGT). Capital gains tax is a tax on the profit made from selling assets, such as a business. The current CGT rate in the UK is 20% for higher and additional rate taxpayers, and 10% for basic rate taxpayers.


However, there are reliefs and exemptions that can be applied to reduce the amount of tax owed on the sale of a business, such as Business Asset Disposal Relief formerly known as Entrepreneurs' Relief


Do I need to declare capital gains to HMRC?


Yes, you are required to declare capital gains to HM Revenue and Customs (HMRC) in the United Kingdom if you have made a profit on the sale of assets, such as property or shares, that are not exempt from capital gains tax.


You should report these gains on your Self Assessment tax return, and pay any tax owed by the January 31st deadline following the end of the tax year in which the gain was made.


How do HMRC know about capital gains?


HM Revenue and Customs (HMRC) typically knows about capital gains through self-assessment tax returns and reporting requirements. UK residents are required to report and pay tax on their capital gains, and this information is used to calculate the tax owed.

In addition, HMRC has access to information from a variety of sources, including banks and other financial institutions, to help ensure that capital gains are accurately reported.


Do I need an accountant to pay capital gains tax?


No, you do not necessarily need an accountant to pay capital gains tax. However, an accountant may be helpful in certain situations, especially if you have complex financial circumstances or are unsure about how to calculate your capital gains tax liability.


An accountant can help you determine your tax obligations, complete and file your tax returns, and ensure that you are following all the relevant tax laws and regulations. Additionally, an accountant may be able to help you minimize your tax liability by finding deductions and other tax-saving strategies. Ultimately, whether or not you need an accountant will depend on your individual circumstances and level of financial expertise.


What is Business Asset Disposal Relief?


Business Asset Disposal Relief is a relief that allows a business owner to pay a reduced rate of tax on the sale of certain business assets. The relief applies to the sale of shares in a company that the individual owned and controlled, or a disposal of assets used in the business. The relief reduces the rate of CGT on qualifying business assets to 10%. In order for the assets to qualify for the relief, the assets have to have been owned for at least two years, as well as meeting certain criteria such as:

  • The assets must have been used in the business.

  • The individual must be a director or employee of the business.

  • The individual must have held at least a 5% shareholding in the company.

  • The company must have been a trading company or the holding company of a trading group.

  • It's worth noting that the relief is capped at £1,000,000 of gains per individual and reliefs cannot be carried forward or back. Additionally, the relief will not apply to the sale of assets that are not used in the business such as commercial properties let to the company.

There are also other reliefs that may be available in addition to Business Asset Disposal Relief, such as the relief for gifts to charity, rollover relief which allows the individual to defer the gain if they reinvest the proceeds into another business, hold-over relief that allows the individual to defer the gain and the loss reliefs.


It is important to plan ahead and consult with a tax advisor when planning to sell your business as they can help to structure the sale in a tax efficient manner and identify any available reliefs and exemptions that may apply.


In summary, when selling a business in the UK, the proceeds may be subject to CGT, but there are reliefs and exemptions available that can reduce the amount of tax owed on the sale, such as the Business Asset Disposal Relief (previously known as Entrepreneurs' Relief) which allows a reduced rate of CGT on qualifying business assets. It is important to consult with a tax advisor and to plan ahead in order to structure the sale in a tax efficient manner, and take advantage of any reliefs and exemptions that may apply.


For further information and impartial advice, feel free to contact our founders at Dexterity Partners.

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