What is capital gains tax? A guide for business owners and landlords

What is capital gains tax (CGT)?

If you own an asset that’s increased in value, you’ve made a ‘gain’. And when you dispose of the asset, HMRC sees the gain as taxable.

Bear in mind it’s the gain that’s taxed, not the total you get for the asset.

So, if you buy an antique for £6,000 and then sell it later for £20,000, you pay capital gains tax on the £14,000 gain.

• Is there a capital gains tax allowance?
• Capital gains tax allowance 2022/23
• Changes to capital gains tax from April 2023
• What are the capital gains tax rates?
• How to work out capital gains tax
• Capital gains tax on business assets
• Capital gains tax on selling property
• Using your capital gains tax allowance
• How to pay capital gains tax
• Will capital gains tax be ‘simplified’?

When do you pay capital gains tax? 

Capital gains tax applies when you dispose of different types of assets, including:

• personal possessions worth £6,000 or more (for example, paintings and jewellery, but not your car)
• property that’s not your main home
• your main home, if you’ve been renting it out or using it for business
• shares outside of ISAs and PEPs
• business assets (including land, plant and machinery, and shares)

There are different capital gains tax rates and allowances to keep in mind, which affect the overall amount you end up paying.

Is there a capital gains tax allowance?

Yes. The capital gains tax allowance is the maximum amount of profit you can earn from your capital gains without having to pay tax. To put it another way – you'll pay tax on profits that exceed your allowance.

Capital gains tax allowance 2022/23

You won’t have to pay tax on the first £12,300 of gains you make (or first £6,150 for trusts). You have to factor this figure in when working out how much capital gains tax you owe.

There are also different reliefs available, depending on the asset. We discuss the relevant ones for small business owners and landlords in some examples later on.

Changes to capital gains tax from April 2023

From April 2023, there will be significant changes to the tax-free allowance on capital gains tax when selling a property that's not your main home.

• the tax-free rate will drop from £12,300 to £6,000 in April 2023
• it will then be halved again to £3,000 in April 2024

What are the capital gains tax rates?

Confusingly, capital gains tax rates differ depending on the income tax band you fall into (basic, higher, or additional rate).

What’s more, there are different rates when you’re selling property.

Higher and additional rate taxpayers pay capital gains tax rates of:

• 28 per cent on residential property
• 20 per cent on other chargeable assets

These rates also apply to trustees or representatives of someone who’s died.

Broadly, the basic rates for capital gains tax are:

• 18 per cent on residential property
• 10 per cent on other chargeable assets

But the amount you actually pay depends on the size of your gain, because it could push you into higher rates.

There’s yet another rate for sole traders or partnerships whose gains qualify for Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief). This is a 10 per cent capital gains tax rate on selling all or part of a business.

How to work out capital gains tax

Here are some relevant scenarios for how capital gains tax applies to businesses and landlords.

Capital gains tax on business assets

Sole traders and business partnerships pay capital gains tax when they sell all – or part of – a business asset.

Limited companies pay corporation tax on profits, including income from selling assets, so capital gains tax doesn’t apply.

Gov.uk gives examples of business assets that capital gains tax applies to:

• land and buildings
• fixtures and fittings
• plant and machinery (a digger, for instance)
• shares
• trademarks
• goodwill, including your business’s reputation (HMRC sees this as quantifiable when you sell the business)

To work out your gain:

Calculate your gain: the difference between how much you paid for the asset and how much you sold it for. You can use the asset’s market value in some situations, for example if it was a gift, or you sold it for less than it’s worth to help the buyer.

Deduct costs: subtract certain costs related to the asset from the gain. These include fees for advertising the asset, money spent on improving the asset, and stamp duty land tax and VAT. There are some costs you can’t deduct, like interest on a loan, or costs you can claim as business expenses.

Consider tax reliefs: tax reliefs can reduce the amount of capital gains tax you need to pay. These include Entrepreneurs’ Relief, Incorporation Relief, Business Asset Rollover Relief, and Gift Hold-Over Relief.

You can report gains in your Self Assessment tax return.

Capital gains tax on selling property

You don’t pay capital gains tax on your main home, unless you’ve rented it out or used it for business.

So capital gains tax mainly applies to buy-to-let landlords, who invest in property to let it to tenants, then eventually sell. You'll also have to pay capital gains tax when selling commercial property  – unless, as mentioned previously, the property is held and sold through a limited company. In that case, you'll pay corporation tax rather than capital gains tax.

Here’s how you work out gains on selling property:

Calculate your gain: the difference between how much you paid for the property and how much you sold it for. You might have to use the property’s market value in some scenarios, for example if it was a gift, you sold it for less than it’s worth to help the buyer, or you inherited it.

Deduct costs: subtract certain costs related to selling or improving the property from your gain. These can include estate agent and solicitor fees, as well as renovations like extensions (but not normal maintenance costs, like decorating).

Consider tax reliefs: if the property was a business asset, some of the business tax reliefs listed above may apply. Otherwise, you could get Private Residence Relief if the property was your main home, or a dependent relative lived in the property.

Gov.uk has a capital gains tax on property calculator that you can use to work out if you need to report and pay.

If you do have to report and pay capital gains tax, you’ll usually need to do this within 30 days of selling the property.

Using your capital gains tax allowance

You don’t need to pay capital gains tax if your total gains fall within your £12,300 allowance.

If your gains are more than £12,300, you pay tax on the difference.

Remember that the rate you pay depends on your tax band. If you’re a higher or additional rate taxpayer, you pay the higher capital gains tax rates (20 per cent, or 28 per cent for property).

But if you’re a basic rate taxpayer, you have to work out whether your gains get pushed above the basic tax band. To do this:

• work out your total taxable income, applying your income tax allowance and any reliefs
• add your total gains (minus your capital gains tax allowance) to your total income
• if the total is within the basic income tax band, you pay 10 per cent on gains above your allowance (18 per cent on residential property). You pay 20 per cent (28 per cent on residential property) on gains above the basic tax band

Gov.uk has an example you can see here.

How to pay capital gains tax

If you reported your capital gain as part of your Self Assessment tax return, you'll need to pay at the same time. 

But if you reported your gain using HMRC's 'real time' capital gains tax service, you can pay HMRC online. There’s an extra charge if you pay with a corporate credit or debit card. 

If you reported your capital gain using a Capital Gains Tax on UK Property account, you can sign in and pay through the portal. You can choose to pay with a credit or debit card, or you can approve a payment directly from your bank account.  If you'd prefer to pay your capital gains tax by bank transfer or cheque, payment details can be found on gov.uk.

Will capital gains tax be ‘simplified’?

With different rates and rules depending on your existing income, as well as the type of asset, capital gains tax can be confusing.

In 2020, the Treasury asked the Office of Tax Simplification to review how capital gains tax might be simplified.

There haven't been any changes announced yet, but we'll keep you updated if we hear more.

As capital gains tax is complicated, please use this as a guide only and speak to a professional about your individual circumstances.

Is there anything in this guide you’d like to know more about? Let us know in the comments below.