What is Capital Gains Tax and when do I need to pay it?

As a sole trader, navigating your tax position to ensure you are abiding by HMRC guidelines and fulfilling your tax obligations is generally straightforward.

What is Capital Gains Tax and when do I need to pay it?

While some freelancers may take the ‘DIY’ approach, many self-employed people enlist an accountant to keep on top of their financial affairs. Rules around taxation for the self-employed vary depending on business activity, such as selling assets, and this is where Capital Gains Tax may feature, writes Julian Pitts, managing partner at Fast Track CVA, a company restructuring expert providing business rescue solutions to financially distressed company directors.

Do Sole Traders need to pay Capital Gains Tax?

When showing an interest in disposing of business assets, Capital Gains Tax (CGT) will come into play for self-employed sole traders and business partnerships. If you wish to sell a company asset and expect to make a profit on the sale, you will be taxed on the increase in value (known as a ‘gain’), also known as Capital Gains Tax.

‘Disposing’ of an asset refers to selling, gifting, transferring it to someone else or receiving compensation for an asset, for example, an insurance pay-out. Assets subject to Capital Gains Tax include property (typically excluding main residence), shares, registered trademarks, land, fixtures, fittings, plant, and machinery.

What is the Capital Gains tax-free threshold?

This tax will apply if you exceed the Capital Gains tax-free allowance for the year which currently stands at £12,300 for 2021/2022. And you will also need to report gains and losses. To determine how much you need to pay in Capital Gains Tax, you will need to calculate gains, minus expenses.

For example, if you buy shares for £50, and sell them on for £500, the increase in value is £450, and you will therefore be liable to pay Capital Gains Tax on the £450 profit.

If you are within the Capital Gains Tax allowance, you will not need to pay Capital Gains Tax. However, you will need to report gains if:

  • You are registered for Self-Assessment
  • You sold your asset for x4 more than the allowance

If you jointly own any assets, you will need to work out your share of the tax and if you are not a UK resident, Capital Gains Tax rules will vary.

Are there any Capital Gains Tax exceptions for Sole Traders?

If you are gifting an asset to your spouse, a civil partner or charity, you will not pay Capital Gains Tax, unless if the asset is sold on or if you separate with your partner or spouse within the same tax year.

What about gifting assets to spouse/civil partner?

If your spouse or partner decides to sell the asset at a later stage, they will pay Capital Gains Tax on the difference in value from when you owned the asset, through to when they disposed of the asset.

What about selling assets to charity?

If you give away an asset to charity, Capital Gains Tax will not apply. If you sell an asset to a charity for more than what you paid for it or less than market value, Capital Gains Tax will apply. This will be calculated based on the amount paid for the asset by the charity.

When is Capital Gains Tax payable?

Capital Gains Tax is reported in your self-assessment tax return and payable by January 31st the following tax year from when the gain occurred.

The rate of tax payable will depend on the type of asset you sell, also known as ‘chargeable assets,’ and your income for the tax year during which you sell the asset. This ranges from 10% or 20% on gains from chargeable assets or 18% or 28% on your gains from residential property.

You may be able to claim Capital Gains Tax relief (recently renamed as Business Asset Disposal Relief and formerly called Entrepreneurs’ Relief), granting a lower level of Capital Gains Tax at 10% for sole traders.

Final thought

Lastly, as tax can unfortunately be taxing contrary to HMRC’s advertising, it is advisable to seek specialist advice on Capital Gains Tax and any available tax relief you may be entitled to.