If you’re selling a firm you own, you may qualify for a special capital gains tax reduction called entrepreneurs’ relief, commonly known as business asset disposal relief.
Do I pay capital gains tax on a business sale?
If you’re selling a business, there are extra reliefs available which can mean you can pay less capital gains tax (CGT) when you sell or give away your company.
Entrepreneurs’ relief – which has since been renamed business asset disposal relief – could allow you to pay a lower CGT rate, levied at 10 percent on the first £1m of gains, when selling a qualified business.
Get a headstart on your 2021-22 tax return with the Which? tax calculator – tot up your bill and submit it directly to HMRC.
How does entrepreneurs’ relief work?
The relief means you will be charged CGT at the basic rate (10 percent ), on the first £1m of gains you make.
For higher or additional-rate taxpayers, who pay 20 percent on most assets, it means you’ll effectively be paying half of the typical rate.
The allowance applies at an individual level, so £1m is the most you may claim per person, rather than for each business you sell.
Any profits beyond the £1m threshold are taxed at the maximum rate – 20 percent if you’ve received taxable income or capital gains above £50,270 in 2022-23 (the same as in 2021-22), for most parts of the UK, and a lower £43,662 in Scotland (also the same in 2021-22). (also the same in 2021-22).
Who can claim entrepreneurs’ relief?
You can claim entrepreneurs’ relief if:
you are a sole trader or partner selling part or all of your business or its assets, or\syou control at least 5 percent of the company’s net assets of which you are selling and are entitled to 5 percent of its distributable profits\syou sell assets from the above businesses within three years of closing down.
Property portfolios that are kept under a corporate structure are not eligible for the entrepreneurs’ relief tax break. You would not be eligible to make a claim, for instance, if you owned multiple rental properties.
There are certain more requirements to meet. It is not possible, for instance, to acquire a firm by inheritance or purchase and then immediately sell it. As of the 6th of April 2019, individuals who have been in qualifying circumstances for at least two years are the only ones who are eligible for the entrepreneur’s relief.
In a same vein, if you had a property investment business, you could not shift the focus of that company after purchasing it and then sell it in order to qualify for the relief. The only companies that are exempt from the relief are those who provide furnished short-term rentals for vacations.
Exist any other prerequisites besides this one?
If you are simply selling a portion of a business, then that portion of the business must be able to function as a “going concern,” which is an accounting term that means it must have the potential to generate profits in the future. Therefore, if you sold parts of the firm that were losing money but you did not have the means to continue funding the business, this wouldn’t qualify.
You are required to complete the sale of a company within three years of the date the company’s operations came to an end if you are selling a company that has ceased trading.
Because the rules can be difficult to understand, it is highly recommended that you seek the guidance of an experienced accountant if you have any doubts. On the website of the HMRC, you can also get more information.
How does CGT function when there is no relief for business owners?
If you or your company do not meet the requirements for entrepreneur’s relief, you will have to determine and settle your tax liability for capital gains in the same manner as when selling any other type of asset. Our guide to capital gains tax rates and allowances has further information that may be found here.
You should begin by calculating the profits you made from the sale of your company.
This indicates that you take the price at which it was sold and deduct the amount that you paid for it, as well as any investments made in the firm and any costs that are related to purchasing or selling it.
The next step is to deduct your personal allowance once you have that. It is possible to make up to £12,300 in capital gains tax-free for the tax years 2021-22 and 2022-23, and married couples can combine their allowances.
Any gains that exceed this threshold will be subject to capital gains tax, which is levied at a rate of 10% for taxpayers paying the basic rate and 20% for taxpayers paying the higher rate.
It is important to keep in mind that your capital gain will be factored into the determination of your tax bracket for the year. This means that even if you are a taxpayer who pays taxes at the basic rate, a significant capital gain could force you to pay taxes at the higher rate.