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 £1m of gains, when selling a qualifying business. This lifetime limit was reduced from £10m in measures announced in the 2020 Budget, with changes taking place from 11 March 2020.
There are special provisions for disposals that were entered into before 11 March.
Where it could lead to savings of up to £1m in tax, the new lifetime limit could save you £100,000.
- Get a headstart on your 2018-19 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 £1m of gains you make (or £10m before 11 March 2020).
For higher or additional-rate taxpayers, who pay 20% on most assets, that means you’ll effectively be charged half of the usual rate.
The allowance applies at an individual level, so £1m is the maximum you can claim per person, rather than for each business you sell.
Any gains above the £1m threshold are taxed at the full rate - 20% if you’ve received taxable income or capital gains above £50,000 in 2020-21 and 2019-20, for most parts of the UK, and a lower £43,430 in Scotland.
For the 2018-19 tax year, higher rate taxes started at £46,351 for England, Wales and Northern Ireland, or £46,351 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. You can't, for example, buy or inherit a business and then immediately sell it. As of 6 April 2019, entrepreneur's relief is only available to people who have been in qualifying circumstances for at least 2 years, but for disposals in the 2018-19 tax year the qualifying period is 12 months.
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 2019-20, you can earn up to £12,000 (£11,700 in 2018-19) in capital gains free of tax, and couples can pool their allowances.
From 2020-21, the CGT allowance will increase to £12,300.
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.
- Find out more: Small business tax: what you need to pay - if you're a small business owner, there are several other taxes you'll need to consider. You can find them all in this guide.