4.6 Capital Gains Tax for Businesses

Capital Gains Tax: who is charged

Capital Gains Tax (CGT) charges individuals (and personal representatives and certain trustees) on chargeable gains accruing on a disposal of a chargeable asset. For this Business Law and Practice topic the chargeable persons are:

• Sole traders who dispose of chargeable business assets (the business as a going concern, goodwill, plant that is not a wasting chattel falling within an exemption, land used in the trade).
• Partners who dispose of their interest in partnership chargeable assets. Each partner is treated as owning a fractional share; a partnership does not itself pay CGT.
• Shareholders who dispose of shares (or who are treated as disposing of shares on a capital distribution in a winding up, or on a company purchase of own shares that is not treated as an income distribution).

A company does not pay CGT. Its chargeable gains are brought into the Corporation Tax computation. Mixing those two taxes is a common FLK1 error.

Residence matters. A UK-resident individual is charged on worldwide chargeable gains, subject to any treaty or foreign-tax credit the question describes. A non-resident is generally charged on gains on UK land and on interests in UK-land-rich entities; other business assets of a non-resident sole trader are usually outside CGT unless a UK permanent establishment is involved.

Calculating the gain, deductions and main reliefs

The computational skeleton is stable even though the numbers change every Finance Act:

Disposal proceeds (or market value if the disposal is a gift or a connected-person bargain) minus allowable expenditure. Allowable expenditure is: the acquisition cost (or March 1982 market value if the asset is a pre-1982 asset and the question engages that rule); incidental costs of acquisition; enhancement expenditure that is reflected in the asset at disposal (not mere repairs); and incidental costs of disposal. Trading-stock treatment and capital-allowance adjustments are applied if the question flags them. The result is the chargeable gain (or allowable loss) before reliefs and before the annual exempt amount. The annual exempt amount is given in the question.

Main CGT reliefs and exemptions — learn the conditions, not a rate:

• Business Asset Disposal Relief (BADR) (the statutory successor to entrepreneurs' relief) reduces the CGT rate on a qualifying disposal of all or part of a sole-trade or partnership business, or of shares in a personal trading company in which the individual has been an officer or employee and has held a 5% interest (ordinary share capital, voting rights, and the economic 5% tests the question specifies) throughout a minimum qualifying holding period (the current period is given if it matters; functioning knowledge is that a multi-year continuous period is required). There is a lifetime limit on gains that can qualify; the limit is given in the question. The trading-company test fails if the company is a holding or investment company.
• Hold-over relief on a gift of business assets (and on certain gifts of shares in an unquoted trading company) can defer the gain by reducing the donee's base cost. Both parties usually have to claim. Hold-over is not automatic on a gift of an investment property.
• Replacement of business asset (rollover) relief defers a gain where the proceeds of a qualifying business asset (typically land, buildings or fixed plant used in the trade) are reinvested in other qualifying assets within the statutory window (broadly 12 months before to 36 months after the disposal — use the window in the question). Partial reinvestment produces a partial deferral.
• Incorporation relief can defer a gain when a sole trader or partnership transfers the business to a company wholly or partly in exchange for shares.
• Investors' relief is a separate, more limited relief for certain newly issued ordinary shares in unlisted trading companies held for a minimum period by an investor who is not an employee; do not apply BADR conditions to it.
• Exempt assets include sterling, most private motor cars, and wasting chattels that are tangible movable property with a predictable life of 50 years or less (subject to the business-use override). Principal private residence relief is a CGT relief, but it is a private-client topic; only mention it if the asset is a dwelling.

Charge, calculation, collection and CGT anti-avoidance

After reliefs, remaining gains of the tax year are reduced by the annual exempt amount (given) and by allowable losses. The question will give the CGT rates that apply to the residual gain (residential-property rates, BADR rates, and standard rates are different stacks). Collection for individuals is through Self Assessment. Residential-property UK land disposals by UK residents also have an in-year reporting and payment window; if the asset in the question is a warehouse used in the trade, that land window is not the main point — the gain is still reported on the Self Assessment return.

Anti-avoidance you must be able to spot:

• Connected persons (including close family and companies they control) are treated as disposing at market value, not at the stated price.
• Bed and breakfasting of shares: a repurchase of the same shares within a 30-day window is matched under the share-matching rules so the loss on the sale is not freely created.
• Value shifting and depreciatory transactions in groups attack arrangements that manufacture a capital loss or strip value before a share sale.
• Targeted anti-avoidance around BADR and incorporation attacks arrangements whose main purpose is to manufacture a qualifying disposal.
• The GAAR can also apply to abusive CGT arrangements.

Worked CGT method (figures supplied). A partner sells her 25% interest in the partnership's freehold workshop. The question gives her share of proceeds, her share of acquisition and enhancement expenditure, incidental costs, the annual exempt amount, and states that BADR conditions are met and gives the BADR rate and remaining lifetime limit. Compute the gain, apply BADR only to the qualifying slice that fits within the remaining lifetime limit, then apply the annual exempt amount, then the rates given. If instead the seller is the company that owns the workshop, stop: that is a Corporation Tax chargeable gain, not CGT.