Do I pay capital gains tax on a business sale?
If you’re selling a business, there are extra reliefs available which might mean you can pay less capital gains tax (CGT) when you sell or give away your company.
Entrepreneurs' relief means you may pay a lower CGT rate, charged at 10% on the first £10m of gains, when selling a qualifying business.
It can be worth a small fortune, potentially saving £1m in tax.
- Get a headstart on your 2017-18 tax return with the Which? tax calculator - tot up your bill and submit directly to HMRC.
How does entrepreneurs' relief work?
The relief means you will be charged CGT at the basic rate (10%), on the first £10m of gains you make.
For higher or additional-rate taxpayers, who pay 20% on most assets, that means you’ll effectively be charged half of the usual rate, saving up to £1m.
The allowance applies at an individual level, so £10m is the maximum you can claim per person, rather than for each business you sell.
Any gains above the £10m threshold are taxed at the full rate - 20% if you’ve received taxable income or capital gains above £46,351 in the 2018-19 tax year for most of the UK, and £43,431 in Scotland.
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
- you control at least 5% of the company's net assets of which you are selling and are entitled to 5% of its distributable profits
- you sell assets from the above businesses within three years of closing down.
Entrepreneurs' relief doesn’t apply to property portfolios held within a company structure. So, for example, if you’re a portfolio landlord you couldn’t claim.
There are some extra conditions. Currently, you need to have been in qualifying circumstances for at least 12 months. So you couldn’t, for example, buy or inherit a business and then immediately sell it. This rule will become more strict after 6 April 2019 and entrepreneurs relief will only be available to people who have been in qualifying circumstances for at least 2 years.
Similarly, if you held a property investment business, you couldn’t change the purpose of that business and then sell to qualify for the relief. The only exception is furnished holiday letting businesses, which do qualify for the relief.
Are there any other conditions?
If you’re only selling part of a business, then that part business must be capable enough of carrying on as a ‘going concern’ – accountants’ speak for being commercially viable. So if you sold loss-making parts of the business, without the means to continue funding it, this wouldn’t qualify.
If you’re selling a business that has ceased trading, you must do so within three years of the company’s operations ending, too.
The rules can be complex, so if you’re not sure it’s worth taking advice from a qualified accountant. More details can also be found on HMRC’s website, here.
How does CGT work without entrepreneur’s relief?
If you or your business don’t qualify for entrepreneur’s relief, you’ll need to calculate and pay your capital gains bill in the same way as when selling any other asset. You can find out more in our guide to capital gains tax rates and allowances.
You start by working out the gains you make on the sale of your business.
This means you take the sales price, and deduct what you paid for it, as well as any investments in the business, and any costs relating to buying or selling it.
Once you have that, you deduct your personal allowance. For 2018-19, you can earn up to £11,700 in capital gains free of tax, and couples can pool their allowances.
You’ll pay CGT on any gain above this threshold – charged at 10% for basic-rate taxpayers, and 20% for higher-rate taxpayers.
Bear in mind that your capital gain will count when working out your tax bracket for the year, so even if you’re a basic-rate taxpayer, a large capital gain can push you into paying the higher rate.