Capital Gains Tax or CGT, can be one of the most important tax considerations for businesses. In basic terms, CGT is incurred when an asset is sold or given away and the market value of that asset has increased since the time at which it was purchased by you.
If you're concerned about potential tax liabilities when transferring business assets, you may want to use our free HMRC Red Flag Checker.
For businesses, CGT is charged as part of your general Corporation Tax Liabilities. Essentially, you will incur CGT when you cease to own any asset. This does not necessarily mean that the asset must be sold. This is especially important for those who are planning on either selling or transferring their own business in order to pay for their retirement, as in these circumstances any gains that you make on this transfer are likely to be subject to CGT.
Conditional Contracts
The CGT regime can appear strict, particularly bearing in mind the fact that you may incur the tax even if you do not receive any money for the asset that you are disposing of. However, there are a number of exemptions and reliefs available, some of which are looked at later in this article. Importantly, however, it is also possible to minimise your CGT liabilities by deferring any gains that are made. To explain this, it is necessary to look at the way in which CGT is charged.
As an individual or a business, CGT is incurred only when two parties agree on an unconditional contract for the transfer of an asset. In these cases, the sale is considered to have taken place as soon as the contract has been agreed, and any gains made by the original owner of the asset will be subject to CGT from that moment. However, if the transfer is made as a result of a conditional contract, the sale is judged to have taken place only when the condition has been fulfilled. Thus, CGT is also incurred only at this point.
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Non-Taxable Allowances
This is relevant as the use of conditional contracts (or contracts that stipulate that the transfer shall occur at some later date) allows the original owner of the asset in question to defer their capital gain. Each individual and business is given a non-taxable allowance for CGT, in the same way as such allowances are granted with regard to Income Tax.
A conditional contract, therefore, could be used to ensure that the gain was deferred until the beginning of the following tax year, ensuring that effective use is made of both years' non-taxable allowance and, if it is under the relevant threshold, that the gain is therefore not subject to CGT. Even if the capital gain exceeds the non-taxable allowance, deferring until the next financial year will ensure that the first £10,900 will not be taxed.
As has been mentioned above, there are a number of other reliefs available on CGT for businesses. The most important of these is known as entrepreners' relief, which is aimed at small business owners. This offers entrepreners a lower CGT rate of 10% for gains up to £10 million made over a lifetime through disposal of all or part of a business. Full details of all relief is available on the HMRC website.
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