Tax bill for selling small businesses clarified
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UPDATE: Since more than half of the respondents to a recent mini poll on PRIME’s client-support site www.primebusinessclub.com expect to sell their business this story directly affects many older entrepreneurs. See Can business sale realistically finance people’s retirement? on this site.
Controversial new rules on Capital Gains Tax that will affect anyone planning to sell a small business have finally been clarified. Tax will be levied on asset sales up a value of £1 million at the rate of 10 per cent, rather than the 18 per cent originally mooted. The higher rate will apply to sales above the £1 million mark.
The new regime comes into effect from the 6th of April 2008.
What is Capital Gains Tax?
If you sell an asset for more than you paid for it, capital gains tax (CGT) may possibly apply. An asset is a resource such property, shares, a piece of equipment or your entire business. It is not the raw material or stock used in the normal day-to-day transactions of most businesses, which are not subject to this tax.
CGT is really aimed at gains made by investing, so if this is central to your business you will need to look into the subject thoroughly.
For most small businesses CGT is most likely to become an issue at the exit stage if you decide to sell your business as a going concern or close down and sell off (or give away) major assets.
The Chancellor’s original proposals made three months ago were highly controversial, and were greeted by frantic lobbying by business groups.
Among the various counter proposals were schemes to reduce the rate or exempt altogether those selling a business to retire. But the government has decided against those, instead opting for a two-tier system where the lower rate is available to anyone selling assets up to the £1 million threshold.
Business owners will have a £1 million lifetime capital gains allowance that will be taxed at 10 per cent - this means you can claim relief for gains made on multiple occasions up to a cumulative total of £1 million.
The government may have decided against confining the lower rate only to those retiring because it wants to encourage people to sell or hand their businesses on to family members as going concerns. Having to wait until retirement to get the tax concession might have discouraged this.
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