IntroductionIf you own your business, are a partner, or own shares in a
business, you may be entitled to tax reliefs that reduce your Capital Gains Tax bill. Capital Gains Tax is due when you sell, give away, exchange or otherwise dispose of business assets.
The rules for each relief are different. Some assets may count as business assets for one relief but not for others. You have to claim some reliefs and you get others automatically if you are entitled.
This guide will help you understand what Capital Gains Tax reliefs could be available to you and where to find more information.
Entrepreneurs' ReliefEntrepreneurs' Relief allows individuals and
some trustees to claim relief on qualifying gains made on the disposal of any of the following:All or part of a businessThe assets of a business after it has stopped tradingShares in a company
The relief applies for the years 2008-09 onwards. There is a maximum lifetime limit of Entrepreneurs' Relief you can claim.
Conditions you must meetDepending on the type of disposal, you need
to meet certain qualifying conditions throughout a qualifying year.
For example, you must have owned the business during the year that ends:On the date your business was disposed of - if
you're selling all or part of your businessOn the date your business ceased - if your
business has ceased
The maximum lifetime limitThere's a maximum lifetime limit on the
amount of Entrepreneurs' Relief you can claim on qualifying gains. The limit is:The first £1 million from 6 April 2008 to 5 April
2010The first £2 million from 6 April 2010 to 22
June 2010The first £5 million from 23 June 2010The first £10 million from 6 April 2011
How the relief worksYou can make claims for Entrepreneurs'
Relief on more than one occasion. The total qualifying gains in all your claims must not exceed the lifetime limit.
Capital Gains Tax is due at 10 per cent on all qualifying gains up to the maximum lifetime limit.
How the relief worksExampleMrs T stopped trading and in July 2011 sells an
asset of the trade making a gain of £75,600.
The gain qualifies for Entrepreneurs' Relief, and she has no other gains or losses.
Capital Gains Tax is due on £65,000 (£75,600 less Annual Exempt Amount £10,600).
At the Entrepreneurs' Relief rate of 10 per cent her Capital Gains Tax due is £6,500.
Business Asset Roll-Over ReliefThis applies when you dispose of some types of
business asset, which you intend to replace. You may be able to 'roll-over' or postpone the payment of any Capital Gains Tax that would normally be due.
You can claim the relief if you're trading and you use both the assets sold or disposed of and the new assets in your trade.
For example you may be able to get relief if you sell your butcher's shop and buy a new one.
Conditions you must meetYou must buy the new asset between one year
before and three years after the date you disposed of the old asset.
HM Revenue & Customs (HMRC) may extend this time limit in exceptional circumstances.
There are different additional conditions for different types of disposal. For example, land and buildings must be occupied as well as used for your trade.
How the relief worksIf you've reinvested all of the proceeds from the
sale or disposal in new business assets, you can 'roll-over' (or postpone) all the gain. There'll be no tax to pay at that time.
You may still be able to postpone part of the gain if either of the following applies:You only reinvested part of the proceedsYour old asset has only partly been used for your
business, for example, you rented out a property for a time and then started using it in your trade
How the relief worksYou only work out the tax due when you sell
or dispose of the new asset. You then work out the tax due by reducing the cost of the new asset by the amount of the postponed gain.
How the relief worksExampleYou bought a freehold office for £45,000 and sell it
for £75,000.You make a gain of £30,000.You reinvest all of the proceeds in new freehold
business premises costing £90,000.You can postpone the whole of the £30,000 gain
made on the sale of the old office, as you have reinvested all of the proceeds.
When you sell the new business premises and work out your Capital Gains Tax bill, you'll treat the cost of the new premises as £60,000 (£90,000 less the £30,000 gain).
Example - proceeds partly reinvestedYou bought a freehold office for £50,000 and
sold it for £100,000.
You made a gain of £50,000.
The new business premises cost £80,000.
The office was disposed of for £100,000 and you reinvested £80,000. The amount not reinvested is £100,000 - £80,000 = £20,000.
Example - proceeds partly reinvestedThe amount of the gain that you can postpone is
You deduct the amount not reinvested (£20,000) from the gain (£50,000). You can postpone the difference of £30,000 (£50,000 - £20,000 = £30,000).
When you sell the new office and work out your Capital Gains Tax bill, you'll treat the cost of the new business premises as £50,000 (£80,000 less the £30,000 gain postponed).
Example - assets used partly for businessYou bought a freehold shop for £80,000 and sell it for
£100,000, reinvesting all of the proceeds in a new asset. You make a gain of £20,000.
But you've only used the shop in your trade for five years out of the ten years you've owned it. Therefore it only qualifies as a business asset for 50 per cent of the time.
You can only postpone 50 per cent of the gain, so the postponed gain is £10,000 (50 per cent of the £20,000 gain).
You'll need to work out the Capital Gains Tax due on £10,000 (the remaining 50 per cent of the gain).
Depreciating assetsIf you reinvest in a 'depreciating asset', the rules are slightly
different. You may need to work out the tax due before you sell or dispose of the new asset.
A depreciating asset is one of the following:Fixed plant or machinery, not forming part of a buildingAn asset that will have a life of 60 years or less from the time you
acquire it (for example a short term lease)
You can still postpone the gain but not always for as long - just until the earliest of the following dates:Ten years from when you bought or acquired the new assetThe date you stop using the new asset in your tradeThe date you sell or dispose of the new asset
Depreciating assetsExampleYou sold your shop for £125,000 and spent
£135,000 on a 30 year lease on 1 August 2011.
You made a gain of £20,000 on the sale of the shop and postponed all of the gain.
You use the leased premises in your trade and sell the lease on 1 July 2023.
Depreciating assetsExampleYou can only postpone the original gain until the
earlier of:31 July 2021(10 years from the date the lease was
acquired)1 July 2023 (the date you stop using the lease)1 July 2023 (the date of sale)
So the gain is postponed until 31 July 2021 (the earliest date). You'll include the gain when working out the Capital Gains Tax due for the 2021-2022 tax year.
How to claim the reliefThere’s a time limit for making a claim.
To work this out you take the later of the following two dates:The date the old asset was disposed ofThe date the new asset was acquired
You then work out when the end of the tax year is that follows this date and add four years on.
Incorporation ReliefIf you incorporate your business, that is, you transfer
your business to a company, Capital Gains Tax may not be due at that time.
Who qualifies?You can qualify for Incorporation Relief as a sole trader or
partner, when you transfer your business to a company.
Conditions you must meetYou must transfer all the business, including all its assets
(other than cash), as a going concern in return for shares in the company.
How the relief worksYou don't have to claim Incorporation Relief. If
it's due, you will receive it automatically.
You only work out the tax due when you sell or dispose of the shares received.
You then work out the tax due by reducing the cost of the shares by the amount of the postponed gain.
Incorporation ReliefExampleYou're a sole trader and incorporate your business,
transferring all of the assets in return for shares.
You receive 1,000 £1 ordinary shares in the new company ABC Ltd with a market value of £100,000.
You make a gain of £60,000 on the assets you disposed of to the company.
You receive Incorporation Relief automatically, so you don't pay Capital Gains Tax on the gain made at that time.
Incorporation ReliefExampleYou later dispose of the shares and work out the
You take the cost of the shares as £100,000 less the £60,000 original gains, Therefore, the cost of the shares to include in your calculations is £40,000. (£100,000 - £60,000 = £40,000).
Gifts Hold-Over ReliefYou may be able to get Gifts Hold-Over Relief if
you give away a business asset. You can postpone all or part of your gain until the asset is sold or disposed of by the person you gave it to.
Who qualifies?You may qualify for Gifts Hold-Over Relief if you're
a sole trader or partner and you've given away a business asset. You may also qualify if you dispose of an asset for less than its full value.
Conditions you must meetYou can claim the relief if you use the asset in the
trade or profession carried on by you or your personal company. Use the glossary link below for more on personal companies.
For example you may be able to get relief if you give away your business premises to your son or daughter.
Shares in trading companies also count as business assets for this relief if they're not listed on a recognised stock exchange.
How the relief worksIf all of the gain qualifies for Gifts Hold-Over Relief, you'll
be able to 'hold-over' or postpone it. There'll be no tax to pay on the disposal at that time.
You may still be able to postpone part of the gain if you receive something for the asset. But you'll have to work out the tax due on the remainder of the gain.
The person you give the asset to will use the relief when they work out their gain. They replace the cost of the asset in their calculations with a lower amount. The lower amount is the market value of the asset at the time of the gift, less the 'held-over' or postponed gain.
Example - full relief dueYou give a workshop with a market value of £35,000 to
The workshop cost £20,000, so you've made a gain of £15,000 (£35,000 market value at the time of the gift less £20,000 cost). You jointly claim Gift Hold-Over Relief, so you have no tax to pay on this gain.
When your brother disposes of the asset, he will need to work out his gain or loss. He will include a cost of £20,000 in his calculations. That's the market value at the date of the gift (£35,000) less the gain (£15,000) = £20,000.
Example - partial relief dueYou give a shop with a market value of £81,000 to your
Your brother pays you £40,000, so you're not due full Gift Hold-Over Relief.
The shop cost £23,000, so you make a gain of £58,000 (£81,000, the market value at the time of the gift, less the £23,000 it cost).
You must pay any Capital Gains Tax due on the amount your brother paid you less your original cost. That's £17,000 (£40,000 less £23,000).
Example - partial relief dueYou can jointly claim Gift Hold-Over Relief on the
remaining £41,000 of the gain (£58,000 gain less £17,000).
When your brother disposes of the asset, he will need to work out his gain or loss. His cost will be the market value at the date of the gift (£81,000) less the relief you've received (£41,000).
So the cost figure he will use is £40,000 (£81,000 less £41,000).
How to claim the reliefYou and the person receiving the gift must make
a formal claim. The exception is when you give an asset to trustees - then only you need to make the claim.
Using your own home for businessYou might work at home because you run your
business from there. If you do, you'll have to look at how you've used your home when you sell or dispose of it. Then you can work out if there's any Capital Gains Tax to pay.
Rooms used for business and personal useIf you've used a room in your home for both
business and private purposes, you'll still qualify for Private Residence Relief on your whole home. For example, you use a room as an office, but you also use it as a guest bedroom. For this reason you don't usually have to pay Capital Gains Tax when you sell or dispose of your main home
Rooms used solely for business useIf you've used any part of your home exclusively
for business purposes, - you won’t get Private Residence Relief on that part. For example, you used part of your home as a joiner’s workshop. But you'll still get the relief on the part used as your main home. If you sell your home at a profit, you'll have to work out the amount of the relief due. Then you can work out if you have any Capital Gains Tax to pay.
Using your own home for businessExampleYou use 25 per cent of your home exclusively as
business premises and 75 per cent as your living area.
You sell your home making a gain of £100,000.
You'd be entitled to Private Residence Relief of £75,000 on the part used as your home (75 per cent of £100,000).
You'd have to work out the Capital Gains Tax due on the remaining gain of £25,000 (£100,000 less £75,000).
FormalitiesAll the information provided is for informational
purposes only and you should seek specialist personalised advice as required. As such, we accept no liability for the actions taken by the readers of this slideshow.
All information was provided by Business Link and is covered by Crown Copyright.
All information is available as shown below: HMRC (2012Capital Gains Tax reliefs for business assets. Available
at: http://www.hmrc.gov.uk/cgt/businesses/reliefs.htm [Accessed: 3rd March 2013]
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