How to work out Capital Gains Tax

Capital Gains Tax (CGT) affects UK business owners when selling assets, shares or their entire business. With HMRC reporting that 8% of CGT income comes from Business Asset Disposal Relief claims, understanding how to calculate your liability is crucial for planning your exit strategy.

If you’re wondering how much Capital Gains Tax you may owe on your business exit, or simply considering your future possible liabilities as a business owner, here’s how to work out Capital Gains Tax with practical examples and calculations.

What is Capital Gains Tax? 

Capital Gains Tax (sometimes referred to by its acronym, CGT) is a tax you pay on the profit you make when you sell (also known as disposing of) an asset that has increased in value. A business you have grown and intend to sell would be considered an asset, which means you may have to pay CGT on it.

CGT applies to UK businesses when selling:

• The entire business or parts of it

• Business equipment and machinery

• Commercial property and land

• Business shares and securities

• Intellectual property (trademarks, patents)

• Goodwill and customer relationships

CGT rates for 2024/25:

• Basic rate taxpayers: 18%

• Higher/additional rate taxpayers: 24%

• Business Asset Disposal Relief: 10% (up to £1 million lifetime limit)

How to work out Capital Gains Tax: step-by-step guide

We highly recommend talking to an accountant or financial advisor to gain an accurate perspective of how much CGT you may be required to pay. If you'd like to work out the cost yourself, the following steps should help you.

You can also use HMRC’s Capital Gains Tax shares calculator for share disposals or HMRC’s Capital Gains Tax property calculator for property disposals.

1. Work out your gross profit

Subtract what you paid for the asset, including any fees and improvements, from what you sold it for, minus any selling costs.

Formula: Sale price - (Original cost + Allowable expenses) = Gross profit

Allowable deductions include:

• Purchase price of the asset

• Legal and professional fees

• Stamp duty

• Improvement costs (not repairs)

• Marketing costs for the sale

• Survey and valuation fees

2. Deduct capital losses 

If you’ve sold other assets at a loss, you can deduct those from the amount you’re taxed on. This includes unused losses from previous tax years.

3. Deduct your allowance

Everyone gets a tax free CGT allowance. Reduce that allowance from your total gains. For the 2024/25 year, that would be £3,000 (reduced from £6,000 in 2023/24).

4. Calculate your relief 

There are other tax reliefs you may be able to claim, particularly if you're selling a business. Find out which of these you're eligible for and subtract any potential relief from your liability. 

Available reliefs include:

• Business Asset Disposal Relief (formerly Entrepreneurs' Relief): 10% rate

• Investors’ Relief: 10% rate for qualifying shares

• Hold-over Relief: defer CGT when gifting business assets

• Roll-over Relief: defer CGT when reinvesting in qualifying assets

5. Work out your tax rate 

How much you pay depends on your tax bands. If you’re part of the basic tax band when you consider your annual income and your profit, you pay 18%. If you’re above that, you pay 24%.

You can use HMRC’s Income Tax for the current year calculator to help determine which tax band you fall into.

Example 1: Sole trader service business sale

Let’s say you're planning to sell a business for £100,000. You’re a sole trader and you’ve built a services business which you’ve been working on for over 3 years. 

You originally invested £10,000 in start up costs and marketing fees when you first launched. This would leave your profit at £90,000. 

Applying your £3,000 Capital Gains Tax allowance would bring that number down to £87,000. Let’s also say you qualify for Business Asset Disposal Relief. This would mean you owe 10% on that number for your bill, bringing your total Capital Gains Tax bill to £8,700.

Example 2: Limited company share sale

Imagine you're a director planning to sell 25% of your company shares for £80,000. You're looking to exit part of your stake in a limited company you've been involved with for over 5 years.

You originally paid £10,000 for these shares when you first invested, plus £1,500 in professional fees for the current sale. This would leave your profit at £68,500.

Applying your £3,000 Capital Gains Tax allowance would bring that number down to £65,500. However, as you don't qualify for Business Asset Disposal Relief on this disposal, you'd pay the standard rate of 24%. This would mean your total Capital Gains Tax bill would be £15,720.

Example 3: Manufacturing equipment sale

Let's imagine you're selling manufacturing equipment for £50,000. You're an engineering firm owner who's upgrading your machinery after several years of successful trading.

You originally bought this equipment in 2020 for £30,000, then spent £5,000 on improvements, plus £1,000 in professional fees for the current sale. This would leave your profit at £14,000.

Applying your £3,000 Capital Gains Tax allowance would bring that number down to £11,000. As you're a basic rate taxpayer and this doesn't qualify for Business Asset Disposal Relief, you'd pay 18% on this amount. This would mean your total Capital Gains Tax bill would be £1,980.

What counts as a business asset? 

Selling your business is only one application of Capital Gains Tax. CGT also applies when you sell off parts of your business. This includes selling things like the reputation and relationships your business is built on, equipment, vehicles, property, land, and even trademarks and patents. If you own shares in a limited company, CGT may apply there too. 

Chargeable business assets include:

• Goodwill and customer lists

• Plant and machinery (you can use HMRC’s balancing charge calculator when you dispose of assets if you’ve claimed capital allowances)

• Business premises

• Intellectual property rights

• Shares in trading companies

• Partnership interests

Business asset disposal relief requirements

To qualify for the reduced 10% rate, you have to meet the following criteria:

For business owners:

• Own the business for at least 2 years before disposal

• Be actively involved in running the business

• Dispose of the whole business or a significant part

For company shareholders:

• Hold at least 5% of ordinary shares and voting rights

• Be an employee or director of the company

• Meet the 2-year ownership requirement

Common mistakes to avoid when it comes to Capital Gains Tax 

The main mistake people make concerning CGT is waiting until after the sale to consider the tax. By then, you may have a bill that'll eat into your profits more than you expected. Another big mistake some people make is assuming they qualify automatically for Business Asset Disposal Relief. There are specific criteria that you need to meet to gain access to this relief. So, make sure you qualify before factoring it in. 

Timing is another possible mistake. Some assets come with a 60 day deadline to report and pay Capital Gains Tax on. If you pass the 60 days offered by HMRC to pay Capital Gains Tax, you could be hit with penalties. 

Other mistakes to avoid:

• Poor record keeping of purchase costs and improvements

• Not considering spouse transfers to utilise both allowances

• Missing opportunities for loss harvesting

• Inadequate business valuation before sale

Possible ways to reduce your Capital Gains Tax bill 

There may be a few possible ways to reduce your total bill. The first one is to check if there are any reliefs you are entitled to. A financial advisor could help you find these. 

Some business owners transfer some of their assets to a spouse. Spouses don’t pay CGT when transferring assets to one another and you may both be able to use your tax free allowance depending on your income for the year. 

Other reduction strategies include:

• Timing disposals across different tax years

• Reinvestment relief when purchasing qualifying business assets

• Incorporation relief when transferring business to a company

• Gift hold-over relief for transfers to family members

CGT payment deadlines and reporting

Once you’ve calculated your Capital Gains Tax liability, it’s important to understand when and how to report and pay the tax to HMRC. Missing these deadlines can result in penalties and interest charges that add to your overall costs.

Key deadlines:

• Residential property disposals: 60 days from completion

• Other business assets: 31 January following the tax year

• On account payments: 31 January and 31 July (if applicable)

Required documentation:

• Self Assessment tax return

• Capital Gains summary pages

• Evidence of purchase costs and allowable expenses

• Professional valuations where relevant

You can check your Self Assessment payment reference details and manage your tax affairs through your HMRC online account.

How to finance your exit strategy 

If you’re considering an upcoming exit, you may be concerned about your short-term funding needs. While selling a business frees up capital, there are immediate financing requirements, particularly if you intend to set up a new business. 

Some suitable funding solutions include bridging loans, if you need short-term funding to cover costs while you wait for the sale to go through or small business loans if you need working capital cash. There is also invoice finance if you need access to cash tied up in unpaid invoices. 

If you want to invest in a business to replace your regular income from your current business, you could consider a loan to buy a business, mezzanine finance to invest in another company, or an unsecured business loan to pay for inventory or development costs. 

Find a business loan to pay Capital Gains Tax with Funding Options by Tide

Have you been stuck with an unexpected Capital Gains Tax bill? If so, a business loan could be a suitable way to help you spread the cost of that tax bill and other relevant expenses. 

We work with over 120 lenders to help eligible borrowers gain between £1,000 and £20 million in funding. We’ve helped more than 21,000 happy customers gain more than £964 million in finance. 

If you’re interested in finding out whether you’re eligible for funding, simply submit your details below and we’ll let you know if you’re eligible – without impacting your credit score. 

Find a business loan.

FAQs

Do I pay CGT on goodwill when selling my business?

Yes, goodwill is a chargeable asset for CGT purposes and forms part of your disposal proceeds.

Can I use Business Asset Disposal Relief multiple times?

Yes, but there's a lifetime limit of £1 million across all qualifying disposals.

What if I reinvest business sale proceeds?

If you reinvest the proceeds from selling your business into qualifying business assets within three years (or up to one year before the sale), you may be eligible for Business Asset Rollover Relief. This relief allows you to defer paying CGT until you dispose of the new asset. Partial relief may apply if only part of the proceeds is reinvested.

How do I calculate CGT on partial business sales?

When only part of a business is sold, you need to apportion the sale price between the underlying assets, including goodwill and tangible assets, based on their relative market values. A professional business valuation is typically required to ensure the apportionment is “just and reasonable” for tax purposes.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

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