Paying Corporation Tax when selling a business asset
Any company selling an asset is liable to pay Corporation Tax and possibly Capital Gains Tax. This applies to both tangible and intangible goods sold in the UK.
In this article, we’ll take a deep dive into everything you need to know about how you pay Corporation Tax, how Capital Gains Tax works and what tax relief may be available to reduce your overall Capital Gains Tax liability.
What is considered to be a company asset?
Broadly speaking, business assets fall into two categories, tangible and intangible. Tangible assets are things such as land, machinery and shares that can be easily quantified. Intangible assets cover more things that are more difficult to measure, such as intellectual property. These are generally valued based on their commercial potential to whoever is buying the asset.
Regardless of the type of asset being sold, there are tax liabilities associated with making a profit on the sale if the total profits exceed your annual tax free allowance.
There are also certain exclusions you can find here that the tax will not apply to, including gains made on things like ISAs or PEPs as well as assets given to a family member or charitable organisation.
If you need HMRC to formally value an asset for tax implications, you’ll need to use a CG34 form.
Trying to open company in the UK as a non resident? Check out our article “How to register a non-resident company for corporation tax”.
Who pays Corporation Tax when selling business assets?
Any limited company operating in the UK must pay tax on any profits made from selling or disposing of business assets.
This also applies to foreign companies that have an organisational base in the UK or other unincorporated associations like sports clubs or co-operatives.
You may also be liable to pay Capital Gains Tax depending on the nature of the company and the business assets being sold. You would also have to pay on assets you have inherited and then chosen to sell at a later date, in addition to paying the usual inheritance tax.
How much tax do you pay when selling a business asset?
How much tax and the type of tax you will pay will depend on if you’re a sole trader, business partnership or limited company.
The ‘gain’ in this case will be calculated on how much the asset you are selling has grown in value since you bought it. For an asset purchased five years ago for £10,000 that has now been sold for £17,000, for example, you are liable to pay tax on the £7,000 increase and not the full amount the asset was sold for.
A self-employed sole trader or a business partner will pay Capital Gains Tax whereas a limited company will pay Corporation Tax.
Your Capital Gains Tax rate will depend on the rate of income tax you pay at the time of the sale. If you pay the higher rate of income tax, you will pay 28% Capital Gains Tax on gains made from residential properties and 20% on gains made on chargeable business assets. You can find out which income tax rate you are on by checking the HMRC site.
Those on the lower rate will simply deduct their tax-free allowance from their total taxable gains made and then add this figure to their total taxable income. If the figures combined would still leave them within the lower band then they pay 10% capital gains on the asset.
This is before you apply savings from ways to reduce Capital Gains Tax through certain tax relief schemes such as Business Asset Rollover Relief.
If you have gained from a mix of residential property and business sale of other assets, you can offset your tax-free personal allowance against any gains you would pay the higher rate on — i.e property asset sales.
Corporation Tax paid when a limited company is selling assets is charged at the standard Corporation Tax rate of 10%. However, larger companies with profits exceeding £250,000 will have their Corporation Tax rate increased to 25% in 2023.
SMEs with profits between £50,000 and £250,000 have dedicated tax benefits available to reduce their total tax bill in the form of marginal relief for limited companies.
Wondering if you have to pay corporation tax when you close your company ? If so, check out our article “Paying corporation tax when selling or closing your business“.
Allowances and reliefs
There is scope to improve your tax position via Business Asset Disposal Relief (formerly entrepreneurs relief). This will reduce your capital gains tax down to 10% on chargeable gains from qualifying assets only if you meet certain criteria. See here for a full rundown of the criteria you’ll need to meet to claim BADR.
This is useful when selling all or part of a business as an asset as those on the higher basic tax rate would normally pay 20% on profits made from asset sales, effectively halving the overall bill.
BADR is allowed on an individual basis (not per business) and will apply to the first £1 million in qualifying profits made. After that chargeable gains will be taxed at the full 20%. For a list on what assets and people qualify see the HMRC site.
Business Asset Rollover Relief
If you have disposed of an asset but used some or all of the profits to buy another business asset, you can delay the Capital Gains Tax you would normally pay until you sell the new asset. Qualifying assets must be sold and purchased within 3 years of each other.
Gift Hold-Over Relief
If you gift business assets or sell them for less than they were originally purchased (or less than they are valued at) you won’t pay Capital Gains Tax. Instead whoever has bought the assets will pay Capital Gains whenever they decide to sell.
How you pay Corporation Tax when selling intangible assets like IP (intellectual property) or ‘goodwill’ will depend on when your company initially bought the asset.
If you purchased assets after 2002, you will add gains made onto your general trading profits. Assets acquired before 2002 have special rules and it’s best to contact a financial advisor for information about this.
You can also offset some of the costs businesses pay on the asset against Capital Gains such as:
- VAT and Stamp Land Duty (unless claiming the VAT back)
- Costs of making improvements to the asset (outside of regular repairs and maintenance)
- Incidental costs like valuation, adverts, acquisition or disposal itself
Not sure about the late payment of corporation tax? Click that link to our article to find out more!
Reporting and paying asset sale tax
There are two primary ways to report an asset sale to the government.
If you’re a UK resident, you can do it immediately using HM revenue’s real time portal for Capital Gains Tax service. This will require a Government Gateway User ID.
You can also do it at the end of the tax year by completing a self assessment form for your tax return.
You will need to keep records surrounding everything involved with the business sale of the asset including calculations on the chargeable gain.These records must be kept for at least 5 years after completing your company tax return. You also must pay your corporation tax on time or you will suffer from late payment penalties.
To ensure you fully understand the tax implications when making a business sale of an asset, we would recommend getting in touch with an accountant at Sleek. We’re well versed in all HMRC rules and a range of accounting systems, and can help you with everything from corporate tax planning to qualifying for allowances.
If you’re unsure about any aspect of your taxes or need assistance with financial tax planning, consulting our tax advisors for corporate tax advice will save you time, money, and potential headaches. To provide you with an efficient and seamless tax process, Sleek has the right set of solutions for you!
Corporations must keep detailed records and report the sale of the asset to HMRC either immediately or at the end of the financial year’s accounting period when completing their corporate tax returns.
Yes. If the equipment has appreciated in value and you have made chargeable gains, you will pay tax on its sale.
The difference in the sale price and the market value will be recorded as a regular chargeable gain and taxed as normal. The book value does not carry tax implications in and of itself.