How to work out Capital Gains Tax

Are you planning on selling a business? If so, you might be interested to know that a 2024 HMRC report stated 8% of Capital Gains Tax income came from sales that qualified for Business Asset Disposal Relief, meaning a large portion of business owners are potentially benefiting from reduced tax rates when exiting their businesses. 

If you’re wondering how much Capital Gains Tax you may owe on your business exit, or simply considering your future possible liabilities as a business owner, here’s how to work out Capital Gains Tax. 

What is Capital Gains Tax? 

Capital Gains Tax (sometimes referred to by its acronym, CGT) is a tax you pay on the profit you make when you sell (also known as disposing of) an asset that has increased in value. A business you have grown and intend to sell would be considered an asset, which means you may have to pay CGT on it. Capital Gains Tax is paid on business assets, shares, and properties that are not considered your primary residence. 

How to work out Capital Gains Tax

We highly recommend talking to an accountant or financial advisor to gain an accurate perspective of how much CGT you may be required to pay. If you would like to work out the cost yourself, the steps are essentially the following. 

Work out your profit 

Subtract what you paid for the asset, including any fees and improvements, from what you sold it for, minus any selling costs. 

Deduct losses 

If you’ve sold other assets at a loss, you can use those to reduce the amount you’re taxed on. 

Use your allowance

Everyone gets a tax free CGT allowance. Reduce that allowance from your total gains. For the 2024/25 year, that would be £3,000. 

Calculate your relief 

There are other tax reliefs you may be able to claim, particularly if you are selling a business. Find out which of these you are eligible for and subtract any potential relief from your liability. 

Work out your tax rate 

How much you pay depends on your tax bands. If you’re part of the basic tax band when you consider your annual income and your profit, you pay 18%, if you’re above that, you pay 24%. 

Example: Let’s say you are planning to sell a business for £100,000. You’re a sole trader and you have built a services business which you’ve been working on for over 3 years. 

You originally invested £10,000 on start up costs and marketing fees when you first launched. This would leave your profit at £90,000. 

Applying your £3,000 Capital Gains Tax allowance would bring that number down to £87,000. Let’s also say you qualify for Business Asset Disposal Relief, which would mean you owe 10% on that number for your bill, bringing your total Capital Gains Tax bill to £8,700. 

What counts as a business asset? 

Selling your business is only one application of Capital Gains Tax. CGT also applies when you sell off parts of your business. This includes selling things like the reputation and relationships your business is built on, equipment, vehicles, property, land, and even trademarks and patents. If you own shares in a limited company, CGT may apply there too. 

Common mistakes to avoid when it comes to Capital Gains Tax 

The main mistake people make concerning CGT is waiting until after the sale to consider the tax. By then, you may have a bill that will eat into your profits more than you expected. Another big mistake some people make is assuming they qualify automatically for Business Asset Disposal Relief. There are specific criteria that you need to meet to gain access to this relief, ensure you qualify before factoring it in. Timing is another possible mistake. Some assets come with a 60 day deadline to report and pay Capital Gains Tax. If you pass the 60 days offered by HMRC to pay Capital Gains Tax, you could be hit with penalties. 

Possible ways to reduce your Capital Gains Tax bill 

There may be a few possible ways to reduce your total bill. The first one is to check if there are any reliefs you are entitled to. A financial advisor could help you find these. 

Some business owners transfer some of their assets to a spouse as spouses don’t pay CGT when transferring assets to one another and you may both be able to use your tax free allowance depending on your income for the year. 

How to finance your exit strategy 

If you’re considering an upcoming exit, you may be concerned about your short-term funding needs. While selling a business frees up capital, there are immediate financing requirements, particularly if you intend to set up a new business. 

Some suitable funding solutions include bridging loans, if you need short term funding to cover costs while you wait for the sale to go through, small business loans if you need working capital cash, or invoice finance if you need access to cash tied up in unpaid invoices. 

If you want to invest in a business to replace your regular income from your current business, you could consider a loan to buy a business, mezzanine finance to invest in another company, or an unsecured business loan to pay for inventory or development costs. 

Find a business loan to pay Capital Gains Tax with Funding Options by Tide

Have you been stuck with an unexpected Capital Gains Tax bill? If so, a business loan could be a suitable way to help you spread the cost of that tax bill any other relevant expenses. 

We work with over 120 lenders to help eligible borrowers gain between £1,000 and £20 million in funding. We’ve helped more than 21,000 happy customers gain more than £964 million in finance. 

If you’re interested in finding out whether you’re eligible for funding, simply submit your details below and we’ll let you know if you’re eligible without impacting your credit score. 

Find a business loan.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.