There are differences between how capital gains and losses are treated in a limited company compared to if you are self-employed, either as a sole-trader or in a partnership. In all types of businesses, selling assets are treated separately on the business’s tax return. The loss or profit from such transactions are known as “capital losses” or “capital gains” and for self-employed, these gains are subject to “capital gains tax”. For limited companies, such gains are called “chargeable gains” which forms part of corporation tax. It is important to remember that tax might be payable even if you give an asset away.
What relief and allowances are available?
The government like to encourage investing in assets as it is generally good for the economy. Therefore, capital gains tend to be less heavily taxed than normal trading income. There are also several reliefs that could be available to you.
For example, some reliefs are only available to individuals rather than companies: gifting assets to your spouse or selling shares held in an ISA will both be exempt usually from capital gains tax. Individuals also don’t pay capital gains tax if they make a profit when selling their car, main residence or personal possessions (known as “chattels”) valued at less than £6,000. However, if you use part of your home exclusively for business, that part will be liable to capital gains tax.
Individuals receive a capital gains tax allowance of £11,100 (in the 2015/16 year) which works in much the same way as the tax-free personal allowance: the first £11,100 of any capital gain is tax-free. You don’t need to report gains of less than this on your personal tax return. Companies receive no such allowance, but they can claim “indexation allowance” which increases the cost of the asset in line with inflation. This reduces the profit – and the tax due – on selling the asset.
How much tax is due on a chargeable or capital gain?
Companies will pay 20% or 21% tax depending on the level of profits. Individuals will pay 18% capital gains tax, or 28% if they are higher rate tax payers (earning more than £42,285 in 2015/16). For individuals, it is therefore worth selling profitable assets when you won’t be a higher rate tax payer, such as when your trading income is lower or when you have made pension contributions which reduce your income. It might be best to sell just one or two assets in each tax year to take advantage of the capital gains tax allowance and to keep you in the basic rate tax band.
Capital gains is a complicated area of law and there are exceptions and conditions for many of the above rules. Other reliefs such as Entrepreneurs Relief and Business Rollover Relief may also be available to you. It is, therefore, vital you seek professional advice from someone suitably qualified before embarking on any financial transactions where capital gains could be involved.