Capital Gains Tax (CGT) applies to the profit made from the sale of certain assets, such as property, shares, or business assets. While individuals and businesses are both subject to CGT, the rules surrounding its application and the rates at which it is charged can differ significantly. Understanding these differences is crucial for effective tax planning. Here’s a breakdown of how CGT differs for individuals and businesses:
1. Rate of Capital Gains Tax
- Individuals: The rate of CGT for individuals depends on their total taxable income and the type of asset sold:
- Basic Rate taxpayers: 10% on most gains (18% on residential property)
- Higher and Additional Rate taxpayers: 20% on most gains (28% on residential property)
- Certain assets, like business assets, may qualify for Business Asset Disposal Relief, reducing the rate to 10%.
- Businesses: For businesses, the tax treatment of capital gains depends on the structure of the business:
- Corporation Tax: Companies are subject to Corporation Tax on the gain made from the sale of assets. The rate of Corporation Tax is typically higher than the CGT rates for individuals, with a standard rate of 25% (from April 2023 onwards).
- Small businesses may benefit from reliefs such as Business Asset Disposal Relief, which can reduce CGT on the sale of certain assets.
2. Annual Exempt Amount (AEA)
- Individuals: Individuals have a personal allowance for capital gains, known as the Annual Exempt Amount (AEA). This allows individuals to make a certain amount of capital gains each year without paying CGT. For the 2024/2025 tax year, the AEA is £6,000. Gains above this amount are subject to CGT at the applicable rate.
- Businesses: Businesses do not receive an equivalent of the AEA. Instead, the gains are taxed under Corporation Tax rules, and there are no personal exemptions.
3. Exemptions and Reliefs
- Individuals: There are various reliefs available to individuals to reduce CGT liability, including:
- Private Residence Relief: Exempts the sale of your primary residence from CGT, provided certain conditions are met.
- Business Asset Disposal Relief: Reduces CGT to 10% on the sale of certain business assets.
- Investors’ Relief: Offers a 10% tax rate for investors in certain companies.
- Businesses: Companies may also benefit from reliefs, such as:
- Entrepreneurs’ Relief (Business Asset Disposal Relief): This relief reduces CGT to 10% for eligible business owners selling assets, provided the assets are used in the business for a certain period.
- Incorporation Relief: If a business owner transfers assets from a sole trader or partnership into a company, they may be eligible for Incorporation Relief, which defers CGT on the transfer.
4. Types of Assets Subject to CGT
- Individuals: CGT for individuals typically applies to the sale of:
- Shares (including stocks and bonds)
- Property (not the main home, unless it does not qualify for Private Residence Relief)
- Business assets (if the individual is a sole trader or partner in a business)
- Businesses: For businesses, CGT applies to the sale of business-related assets such as:
- Commercial property
- Shares in subsidiaries or trading companies
- Intangible assets (e.g., intellectual property)
5. Treatment of Losses
- Individuals: If individuals sell assets at a loss, they can offset the loss against other capital gains made in the same tax year. If there are no gains, the loss can be carried forward to offset future gains. Individuals must declare losses to HMRC to ensure they are taken into account.
- Businesses: Companies can also offset capital losses against gains made in the same accounting period, but losses cannot be carried back to offset previous profits. Losses can be carried forward to offset future capital gains.
6. When CGT Is Paid
- Individuals: Individuals must pay CGT on capital gains when they sell an asset, and the tax is due when filing their Self-Assessment tax return. Payment is due by 31 January following the end of the tax year in which the gain was made.
- Businesses: Companies pay CGT on their capital gains as part of their Corporation Tax filing. CGT is included in the overall Corporation Tax return, and tax payments are typically made based on the company’s financial year.
7. Treatment of Business Assets for Individuals vs. Businesses
- Individuals: When individuals sell assets related to their business (e.g., goodwill, equipment), they may be eligible for Business Asset Disposal Relief, reducing CGT to 10% on the gain from the sale of qualifying business assets.
- Businesses: Businesses can claim Entrepreneurs’ Relief or other reliefs on the sale of qualifying business assets, such as the sale of shares in a trading company or the sale of property used for business purposes.
Conclusion
While both individuals and businesses are subject to CGT, the rules surrounding the rate, allowances, exemptions, and reliefs differ. Individuals typically benefit from the Annual Exempt Amount and may pay lower tax rates on capital gains, especially for business assets, while businesses are subject to Corporation Tax and do not have access to the same allowances. It’s important to understand these differences and the available reliefs to minimize tax liabilities effectively. Whether you are an individual investor or a business owner, seeking advice from a tax professional can help you navigate the complexities of CGT and make the most of the available reliefs.
