How Does Capital Gains Tax Apply to Business Asset Disposals?

At Towerstone, we provide specialist capital gains accountancy services for business owners disposing of assets. We have written this article to explain how Capital Gains Tax applies when selling business assets, helping you make informed decisions.

From experience, Capital Gains Tax on business asset disposals is one of those topics that sounds technical and intimidating but is actually very logical once you understand the framework. I deal with this regularly for sole traders, partners, and company directors who are selling assets, restructuring, or winding things down, and in my opinion most problems arise not because the tax is unfair, but because people do not realise a disposal has taken place or they misunderstand which reliefs apply.

Capital Gains Tax, often shortened to CGT, is not just about selling shares or second homes. It can apply when a business sells or transfers assets such as property, goodwill, equipment, vehicles, or even parts of a business. The tax treatment depends heavily on the structure of the business, the nature of the asset, and what happens to the proceeds.

In this article, I am going to explain clearly how Capital Gains Tax applies to business asset disposals in the UK, who pays it, when it applies, how gains are calculated, and which reliefs can reduce or eliminate the tax. Everything here reflects real world UK practice and what I see when business owners come to me after a sale or disposal has already happened.

By the end, you should understand when CGT applies, how much it can be, and how to approach business asset disposals in a way that avoids nasty surprises.

What is a business asset disposal?

A business asset disposal occurs when a business asset is sold, transferred, given away, or otherwise disposed of.

From experience, many people think a disposal only happens when money changes hands. That is not correct. A disposal for CGT purposes can occur even if no cash is received.

Common examples of business asset disposals include:

Selling business premises

Selling machinery or equipment

Selling goodwill when a business is sold

Transferring assets from a business to personal ownership

Giving business assets to another person or company

Closing a business and taking assets out

In my opinion, the key concept is this. If ownership of a business asset changes or the business stops owning it, HMRC will usually see that as a disposal.

Which businesses are affected by Capital Gains Tax?

Capital Gains Tax applies differently depending on the legal structure of the business.

From experience, the position is:

Sole traders and partnerships pay Capital Gains Tax personally

Limited companies do not pay Capital Gains Tax, they pay Corporation Tax on gains

Company shareholders may pay Capital Gains Tax when selling shares

This article focuses primarily on Capital Gains Tax for individuals disposing of business assets, such as sole traders, partners, or individuals selling shares in their own company.

If you operate through a limited company, the company itself does not pay CGT, but the tax issues do not disappear, they just move into Corporation Tax and shareholder CGT territory.

When does Capital Gains Tax apply to business asset disposals?

Capital Gains Tax applies when you dispose of a business asset and make a gain.

A gain arises when the disposal value exceeds the allowable cost of the asset.

From experience, CGT can apply even if:

The asset was fully written off for income tax purposes

The asset was used partly for business and partly personally

The asset is transferred rather than sold

CGT does not usually apply to normal trading income. It applies to capital assets, which are assets used in the business rather than held for resale.

How is the gain calculated?

In simple terms, the gain is calculated as:

Disposal proceeds
minus
Allowable costs

Allowable costs usually include:

The original purchase price

Legal fees and professional costs of acquisition

Improvement costs that enhanced the asset

Selling costs such as agent fees

From experience, people often forget that improvement costs can be added to the cost base, but routine repairs cannot.

The resulting figure is the capital gain before reliefs and allowances.

What if the asset was partly used personally?

This is very common.

For example, a sole trader might use part of their home as an office, or a vehicle might be used for both business and private purposes.

In these cases, the gain is usually apportioned between business and personal use.

From experience, this apportionment must be reasonable and consistent with how the asset was actually used. HMRC will challenge aggressive allocations.

What happens if the asset is given away or sold cheaply?

If a business asset is gifted or sold to a connected person at less than market value, HMRC generally treats the disposal as taking place at market value.

This applies even if no money changes hands.

From experience, this catches people out when assets are transferred to family members or into a company.

In my opinion, if you are transferring assets without a commercial sale, always assume CGT may still apply.

Business Asset Disposal Relief explained

One of the most important reliefs in this area is Business Asset Disposal Relief, previously known as Entrepreneurs’ Relief.

From experience, this relief is often misunderstood or assumed to apply automatically. It does not.

Business Asset Disposal Relief can reduce the CGT rate on qualifying gains to 10 percent, subject to a lifetime limit.

It can apply to:

Disposal of all or part of a business

Disposal of assets used in a business when the business is closed

Disposal of shares in a trading company

There are strict conditions around ownership, involvement, and timing.

Conditions for Business Asset Disposal Relief

In broad terms, to qualify, you usually need to have:

Owned the business or shares for at least two years

Been actively involved in the business

Disposed of the business or ceased trading

For asset disposals linked to cessation, the timing is critical.

From experience, assets disposed of too long after the business stops trading may not qualify.

In my opinion, timing mistakes are one of the most expensive errors I see with this relief.

Capital Gains Tax on goodwill

Goodwill is one of the most misunderstood business assets.

When a sole trader or partnership sells a business, part of the sale price often relates to goodwill.

Goodwill is a capital asset, and its disposal can create a capital gain.

From experience, goodwill is often where the largest CGT exposure arises, especially for professional practices and service businesses.

The tax treatment depends on:

Whether goodwill was created internally or purchased

When it was created

Who is buying it

In my opinion, goodwill should always be reviewed carefully before agreeing a sale price.

Disposal of business property

Business property disposals are a major CGT trigger.

This includes:

Shops, offices, and workshops

Land used in the business

Parts of a home used for business

From experience, business property can benefit from Business Asset Disposal Relief in some circumstances, but not always.

If a property has been used for both business and residential purposes, careful apportionment is required.

What about assets fully written off for tax?

A very common misconception is that if an asset has been fully written off through capital allowances, there is no CGT when it is sold.

This is not correct.

Capital allowances deal with income tax or Corporation Tax. Capital Gains Tax is a separate calculation.

From experience, selling an asset for more than its tax written down value can trigger a balancing charge for income tax purposes and still leave a capital gain for CGT purposes.

Capital Gains Tax allowances and rates

Individuals have an annual CGT allowance. Gains below this amount are not taxed, although they may still need to be reported.

Above the allowance, CGT rates depend on:

The type of asset

The individual’s income level

Whether any reliefs apply

Business assets may be taxed at different rates depending on whether Business Asset Disposal Relief is available.

When is Capital Gains Tax payable?

For most business asset disposals, CGT is reported through Self Assessment and paid by 31 January following the end of the tax year.

However, disposals of UK residential property have accelerated reporting and payment rules.

From experience, missing CGT deadlines is a common issue, particularly when business owners are focused on the commercial transaction rather than the tax consequences.

What records should be kept?

Good records are essential.

From experience, HMRC expects you to retain:

Purchase documents

Sale agreements

Valuations where market value is used

Evidence of costs and improvements

Calculations supporting relief claims

Poor records do not remove the tax, they just make disputes more likely.

What happens if Capital Gains Tax is not reported?

Failing to report CGT on business asset disposals can lead to:

Interest on unpaid tax

Penalties for inaccuracies or failure to notify

HMRC enquiries

In my opinion, CGT is one of the areas HMRC looks at closely because it is often underreported.

Planning business asset disposals properly

From experience, the best CGT outcomes usually come from planning before a disposal rather than reacting afterwards.

This may involve:

Reviewing eligibility for Business Asset Disposal Relief

Timing disposals to use allowances efficiently

Structuring transactions carefully

Considering incorporation or extraction strategies

In my opinion, CGT planning is about sequencing and structure, not avoidance.

Common mistakes I see with business asset CGT

Some of the most common issues I see include:

Assuming reliefs apply automatically

Missing the timing window for relief

Forgetting market value rules

Ignoring goodwill

Treating CGT as an afterthought

Almost all of these are preventable.

A practical example from experience

I regularly see cases where a sole trader sells their business, receives the proceeds, and only later asks about tax.

At that point, options are limited. Reliefs may still apply, but planning opportunities are reduced.

By contrast, where the tax position is reviewed before contracts are signed, outcomes are usually far better.

Where this leaves you

Capital Gains Tax on business asset disposals is not something to fear, but it is something to respect.

In my opinion, CGT becomes expensive when it is ignored, misunderstood, or left too late. When it is addressed early and properly, the rules are clear and the reliefs are generous for genuine business owners.

From experience, the most important takeaway is this. A business asset disposal is as much a tax event as it is a commercial one. Understanding how CGT applies, and acting before rather than after the disposal, is the difference between a controlled tax outcome and an unpleasant surprise.

If you would like to explore related Capital Gains Tax guidance, you may find How does Capital Gains Tax work on cryptocurrency and NFTs and How is Capital Gains Tax calculated on shares and investments useful. For broader Capital Gains Tax guidance, visit our Capital Gains Tax hub.