How Does Capital Gains Tax Apply to Business Asset Disposals?

Introduction

When you sell, give away, or dispose of an asset used in your business, you may have to pay Capital Gains Tax (CGT) on any profit made. These are known as business asset disposals. The tax applies to both individuals and business owners who operate as sole traders or partners.

However, there are several reliefs available that can reduce or delay the amount of CGT due, particularly for business assets. This article explains how CGT applies when you sell business assets, how to calculate it, and what reliefs can help lower your tax bill.

What Counts as a Business Asset Disposal

Capital Gains Tax applies when you dispose of an asset that has increased in value since you acquired it. For business purposes, this includes:

• Land or buildings used by your business

• Machinery, equipment, or vehicles used in the business

• Shares in your personal company (where you hold at least 5%)

• Goodwill (the value of your business’s reputation)

• Intellectual property such as patents or trademarks

A “disposal” means selling, transferring, gifting, or exchanging the asset for something else. CGT is based on the gain, not the total sale price.

Calculating Capital Gains on Business Assets

To calculate your capital gain:

1. Start with the sale price or market value (if given away).

2. Subtract the original cost of the asset and any associated costs, such as legal fees or stamp duty.

3. Deduct the cost of improvements (not routine maintenance).

4. The result is your chargeable gain.

Once you have worked out the gain, you apply the relevant CGT rate and any reliefs you are eligible for.

CGT Rates for Business Assets

For the 2024 25 tax year, the rates of CGT depend on your total taxable income and the type of asset being sold:

• 10% for basic-rate taxpayers (if within their remaining basic-rate band).

• 20% for higher- and additional-rate taxpayers.

However, specific reliefs such as Business Asset Disposal Relief (BADR) can reduce the rate to 10% on qualifying business disposals, even for higher-rate taxpayers.

Business Asset Disposal Relief (BADR)

Formerly known as Entrepreneurs’ Relief, BADR allows eligible individuals to pay a reduced CGT rate of 10% on qualifying business gains, up to a lifetime limit of £1 million.

To qualify for BADR, you must meet the following conditions:

• You are a sole trader or business partner disposing of part or all of your business, or

• You are selling shares in a trading company where you hold at least 5% of shares and voting rights, and

• You have owned the business or shares for at least two years before the sale.

BADR applies when you sell:

• The whole or part of your business

• Assets used in your business when you cease trading

• Shares in your personal trading company

If the disposal qualifies, your taxable gain is charged at a flat 10% rate, regardless of your normal tax band.

Rollover Relief

Rollover Relief allows you to defer CGT if you sell a business asset and use the proceeds to buy another qualifying asset.

For example, if you sell a shop building and reinvest the profit into a new property for your business within three years, you can roll over the gain. This means you do not pay CGT immediately the tax is deferred until you sell the new asset.

To qualify, both the old and new assets must be used for business purposes. The new asset must be bought within three years before or after the sale.

Incorporation Relief

If you transfer your sole trader or partnership business into a limited company, Incorporation Relief may apply. This allows you to delay paying CGT on gains from transferring business assets into the company.

The gain is not immediately taxed. Instead, it is “rolled over” into the value of the shares you receive in exchange for the business. You will pay CGT later when you sell those shares.

To qualify, all the business assets (except cash) must be transferred to the company in exchange for shares.

Gift Hold-Over Relief

If you give away or sell a business asset at less than market value (for example, transferring it to a family member), Gift Hold-Over Relief can prevent an immediate CGT bill.

The gain is “held over” and only becomes taxable when the new owner eventually sells or disposes of the asset. Both you and the recipient must agree to claim the relief, and it applies to:

• Assets used in a trade or business

• Shares in your personal trading company

This relief is particularly useful for family succession planning, allowing business assets to pass between generations without triggering immediate CGT.

Example Scenario

Let’s say you own a small café and decide to sell the business, including its building and equipment. The total gain on the sale is £300,000.

Because you have owned the business for more than two years and meet the conditions for Business Asset Disposal Relief, the gain qualifies for the 10% CGT rate.

Your tax bill is therefore £30,000 (£300,000 x 10%), instead of £60,000 if taxed at the standard 20% rate.

Using Losses to Reduce CGT

If you have made a loss on the sale of other assets, you can offset these capital losses against your business gains to reduce your taxable amount.

You can also carry forward unused losses from previous years to offset future capital gains. Losses must be reported to HMRC within four years of the end of the tax year in which they occurred.

How to Report and Pay CGT on Business Assets

For most business asset disposals, you report your gain through the Self Assessment tax return. The deadline for filing and paying CGT is 31 January following the end of the tax year in which the disposal occurred.

For example, if you sold a business asset in June 2024, you must report and pay any CGT due by 31 January 2026.

Keep records such as:

• Purchase and sale documents

• Valuations and invoices for improvements

• Any evidence of reinvestment if claiming Rollover Relief

The Role of an Accountant

CGT on business disposals can be complex, especially when claiming multiple reliefs. An accountant can:

• Calculate your taxable gain accurately

• Identify which reliefs you qualify for

• Help structure sales to minimise tax

• Ensure claims are filed correctly and on time

Good tax planning before a sale can significantly reduce the amount of CGT payable and help you make the most of available reliefs.

Conclusion

Capital Gains Tax applies to profits from selling or transferring business assets, but several reliefs can reduce or delay what you owe. Business Asset Disposal Relief, Rollover Relief, Incorporation Relief, and Gift Hold-Over Relief all provide valuable opportunities to manage your CGT liability effectively.

Understanding how these reliefs work and planning ahead ensures you pay only the tax necessary and retain as much profit as possible from the sale of your business assets.