business: calculating capital gains tax

IntroductionThis guide will help you calculate your capital

gains and losses if you sell or otherwise dispose of business assets in the 2011-12 tax year.

Typical business assets include land, buildings, machinery and certain shares.

There are some examples that will help you get your Capital Gains Tax right.

Working out your capital gains or losses for 2011-12You must work out the gain or loss separately for

each business asset when you sell, give away, exchange or otherwise dispose of it. This step-by-step guide explains how to do that in straightforward cases.

If you sell or dispose of other types of assets in 2011-12, you must work out each gain or loss separately. Then you can work out your overall gains or losses.

Step 1: Work out how much you receivedThe amount received for your business asset

is usually the sale price. This is the amount of money you received for the asset when you sold or disposed of it.

However, sometimes you need to use the market value of the asset instead of the sale price. The market value is the price your asset might reasonably have been expected to fetch on a sale in the open market.

When to use market valueSome examplesYou use the market value of the asset instead

of the sale price if, for example:You give the asset away.You intentionally sell or dispose of the asset for

less than it's worth.You sell or dispose of the asset to a ‘connected

person’, such as a close relative or a company you control. See the special rules below if the connected person is your husband, wife or civil partner. See the link below for more on 'connected persons'.

Special rules for husbands, wives and civil partnersIf you sell or transfer a business asset to your husband,

wife or civil partner you usually won't have to pay any Capital Gains Tax on that disposal. You must have lived together for at least part of the tax year in which you make the disposal.

This does not apply to other people you're connected with (for example your brother).

This does not apply if you're separated for the whole of the year in which the disposal occurs. You must use the market value of the asset disposed of, at the date of disposal as the amount received.

Step 2: Work out how much your asset costThe cost of your business asset is normally

the amount you paid for it when you bought or acquired it.

However, sometimes you need to use the market value of the asset instead of the cost.

Using market valueSome examplesYou use the market value of the asset instead of the

cost if:You owned the business asset at 31 March 1982 - you

use its market value on that day.It was a gift made after 31 March 1982 - you use its

market value when it was given to you, unless there's been a claim for Gift Hold-Over Relief (see the link below). Or see the section below if it was a gift from your husband, wife or civil partner - special rules apply.

You inherited it after 31 March 1982 - you use its market value on the date of death of the person who left it to you.

Special rules for husbands, wives and civil partnersIf you received the asset from your husband,

wife or civil partner when you were living together, you usually use the amount the asset cost them.

But if your husband, wife or civil partner owned the asset at 31 March 1982 you use the market value on that day instead.

Checking the market valueHM Revenue & Customs (HMRC) can check

your valuation to help you complete your Self Assessment tax return. To request this complete form CG34 Post Transaction Valuation Check after you've disposed of the asset. Form CG34 contains the address you should send it to.

Please allow at least two months for HMRC to check the valuation.

Step 3: Work out how much you spent to buy, sell or improve your assetIf you've spent extra money to buy, sell or improve

your business asset, you can deduct certain costs.

Costs you can deduct include:Fees or commission for professional advice or services

- for example Capital Gains Tax valuations, solicitors' and estate agent or advertising fees

Improvement costs to increase the value of the asset - but not normal maintenance costs such as repairs and decorating

Stamp Duty Land Tax and VAT - unless you can reclaim the VAT

Step 5: Apply tax reliefsIf you've worked out that, so far, you've made a gain,

there are tax reliefs that may reduce or postpone that gain.

For example, the following reliefs may be available:Entrepreneurs’ Relief - if you sell or dispose of

business assetsBusiness Asset Roll-Over Relief - if you sell or

dispose of business assets and reinvest the profits in certain other business assets

Gift Hold-Over Relief - if you make a gift of a business asset

Step 6: Work out your Capital Gains TaxThrough steps 1 to 5, you've worked out the gain or loss on

a business asset and applied reliefs.If you sell or dispose of other assets in 2011-12, repeat

these steps to work out the separate gain or loss for each asset.

You must:Work out all of your individual gains and losses, for each asset

you’ve sold or disposed ofSee if you have overall gains or losses to find out if you owe taxWork out the rates of Capital Gains Tax to applyWork out which gains to use your Annual Exempt Amount

against

Step 6: Work out your Capital Gains TaxIn most cases:

You add together all of your gains for that tax year.

You add together all of the allowable losses you've made for that tax year.

You deduct losses from the gains to work out the overall net gain or loss.

If the overall net gain is below the annual tax-free allowance (known as the ‘Annual Exempt Amount’), there's no Capital Gains Tax to pay.

Step 6: Work out your Capital Gains TaxIn most cases:

If the overall net gain is above the Annual Exempt Amount, you deduct unused losses from a previous tax year. Deduct enough to reduce your gains to the Annual Exempt Amount. You can carry the rest forward to future tax years.

If you have overall net gains work out which Capital Gains Tax rates apply and how to use your tax-free allowance. For 2011-12 Capital Gains Tax is due at 10 per cent for all gains on any business assets qualifying for Entrepreneurs' Relief.

If you have gains chargeable at different rates, deduct the Annual Exempt Amount in the way which minimises your tax due.

Step 6: Work out your Capital Gains Tax ExampleIn July 2011 Mr P made a gain of £50,600 on the sale of land

and buildings.

He also sold some shares in August 2011 in his personal trading company making a gain of £20,000.

His total gains for the 2011-12 tax year are £70,600 (£50,600 + £20,000 = £70,600). This is more than the Annual Exempt Amount so he has tax to pay.

Mr P is a higher rate taxpayer, so he pays tax at 28 per cent on gains not qualifying for Entrepreneur’s relief and 10 per cent on qualifying gains.

Step 6: Work out your Capital Gains Tax ExampleThe £20,000 gain on shares qualifies for

Entrepreneur's Relief and is within Mr P's lifetime limit and so is taxed at 10 per cent.

Mr P deducts the Annual Exempt Amount from his remaining gains of £50,600.

As he is a higher rate Income Tax payer, the remaining £40,000 is taxed at 28 per cent.

He must pay Capital Gains Tax of £13,200 (£20,000 at 10% plus £40,000 at 28%).

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 (2012) How to calculate capital gains and losses on business

assets. Available at: http://www.hmrc.gov.uk/cgt/businesses/calc-cgt.htm#1 [Accessed: 3rd March 2013]

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Information fromHMRC