Personal and business capital gains are treated differently, depending on whether you are self-employed (as a sole trader or in a partnership) or trade as a limited company.
Personal capital gains (eg on privately owned shares) and business gains made by the self-employed are dealt with through capital gains tax (CGT) while capital gains made by a company are subject to corporation tax as chargeable gains.
While business capital gains can add to your tax liabilities, capital gains can also provide an important tax planning opportunity for business owners. Business CGT attracts important reliefs — particularly when you sell your business — and is taxed less heavily than income.
CGT for personal capital gains and business capital gains made by the self-employed may apply whenever you dispose of an asset, for example, by selling it or giving it away. CGT does not generally apply when you give assets to your spouse.
Some personal possessions are not liable for CGT. These include your car, personal possessions worth less than £6,000 and various tax-free investments (eg ISAs). There is usually a CGT exemption on gains made on the disposal of up to £50,000 worth of shares held by an employee shareholder. Although property (land and buildings) is liable to CGT, private residence relief usually means there is no CGT when you sell your only or main home.
All business capital gains — when you dispose of a business asset — are subject to CGT. This can include personal assets used in your business, for example, if you run your business from home.
There is no CGT to pay if your total personal and business capital gains are within the annual CGT tax-free allowance of £11,100 in 2016/17 and the total value of assets disposed of is within four times this amount. Any losses you have made disposing of assets liable to CGT can be set against gains when working out your total capital gains.
Above this level, personal and business capital gains must be reported on additional CGT pages in your self-assessment tax return. CGT is normally payable at 10% if your income is within the basic rate tax band (20% otherwise). Note: prior to 2016/17, CGT was payable at 18% and 28%.
Capital gains tax planning can offer worthwhile tax savings. Simple CGT planning opportunities can include making use of your spouse’s CGT allowance and selling loss-making assets to offset against gains if you have exceeded the CGT allowance. You should also make sure you are deducting any allowable costs of buying, improving or selling an asset when you work out the capital gain.
Creating business capital gains — rather than taking high levels of income — can be highly tax-efficient. When you sell your business, capital gains can qualify for a tax rate of just 10% if Entrepreneurs’ relief applies. Other CGT reliefs can allow you to defer a capital gains tax liability.
Other business capital gains tax planning opportunities can include making pension contributions to reduce your income (so that CGT is payable at the lower rate), spreading business capital gains over several years and holding business assets that grow in value within your pension fund (where CGT will not apply).
Personal and business capital gains tax planning can be complicated. You may want to take advice as part of your overall tax planning.