Learning Outcomes
By the end of this article, you will be able to identify who pays Capital Gains Tax (CGT) in a business context, explain what counts as a chargeable gain, outline how CGT is calculated, including principal reliefs and exemptions, and apply core CGT concepts to SQE2-style scenarios. You will also understand practical implications for business owners, including partnerships and company shareholders.
SQE2 Syllabus
For SQE2, you are required to understand capital gains tax in the context of business structures and transactions. Your knowledge should support both advising clients and identifying issues in exam scenarios, especially regarding calculations and practical tax consequences. Focus your revision on:
- recognising when CGT arises for individuals, partners, and shareholders in business scenarios
- identifying what constitutes a chargeable gain and a chargeable asset
- calculating capital gains, applying reliefs, exemptions, and allowable deductions
- understanding reliefs such as business asset disposal relief and roll-over relief
- explaining the tax treatment of asset disposals, gifts, and business sales
- identifying who is responsible for CGT in partnerships and on shares
- distinguishing CGT from other forms of business taxation
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- Who is liable to pay capital gains tax on a gain arising from the disposal of an asset by a sole trader?
- Which relief potentially reduces the CGT rate to 10% on the disposal of a qualifying business asset?
- How does the annual exemption operate when a taxpayer claims hold-over or roll-over relief?
- List at least two types of assets that are not chargeable for CGT purposes.
Introduction
Capital Gains Tax (CGT) is a charge on the increase in value of certain assets when they are disposed of by individuals or partners in a business, including business owners and shareholders. Understanding CGT is essential for advising on business sales, gifts, disposals of shares, and succession planning. This article sets out when CGT is payable, what reliefs and exemptions may apply, and how to approach common scenarios tested in the SQE2.
Who pays capital gains tax in business?
CGT is paid by individuals—including sole traders and partners—when they dispose of chargeable assets. Companies do not pay CGT; instead, they pay corporation tax on capital gains.
Key Term: capital gains tax
A tax charged on the increase in value (gain) realised by individuals (including sole traders and partners) when a chargeable asset is disposed of.Key Term: chargeable person
Any individual or partner (not a company) who makes a chargeable gain when disposing of a chargeable asset.Key Term: chargeable asset
Most tangible and intangible items of property, other than sterling and certain exempt assets. Includes land, shares, goodwill, and business equipment used for trade.
What triggers capital gains tax?
CGT is triggered when a chargeable person disposes of a chargeable asset. Disposal includes sales, gifts, exchanges, and certain transfers on death (although special rules apply to death and inheritance tax).
Key Term: disposal
Any action by which legal ownership of a chargeable asset changes: sale, gift, exchange, or transfer of ownership.
Worked Example 1.1
Eva runs a bakery as a sole trader and sells her business premises for more than she originally paid. Is this transaction subject to capital gains tax?
Answer:
Yes. Eva is an individual disposing of a chargeable asset. If she makes a gain after deducting allowable costs and reliefs, she will pay CGT on that gain.
Calculating the basic gain
The basic gain for CGT is the difference between:
- The disposal value (market value if transferred at undervalue or as a gift)
- Less the original acquisition cost
- Less allowable expenses (such as professional fees, incidental acquisition/disposal costs, and capital improvements)
Key Term: allowable expenditure
Deductible costs incurred wholly and exclusively for acquiring, improving, or disposing of a chargeable asset.Key Term: basic gain
The gain before reliefs and exemptions—disposal value minus (cost + allowable expenditure).
CGT is then charged after deducting available reliefs and the annual exemption.
Key Term: annual exemption
A set annual amount of capital gain each individual can realise tax-free. Only applies where tax is paid now (not when gain is deferred/held over).
Worked Example 1.2
Nathan sells machinery bought for £10,000 for £17,000. He spent £1,000 on buying and selling costs. What is the basic gain before reliefs?
Answer:
£17,000 – (£10,000 + £1,000) = £6,000
Reliefs and exemptions
Taxpayers can claim a range of reliefs and exemptions to reduce CGT.
Main reliefs
- Business asset disposal relief (BADR): Formerly “entrepreneurs’ relief.” Gains on disposal of a qualifying business asset (sole trade, partnership, or shares in a trading company) may be taxed at 10% up to the lifetime allowance.
- Roll-over relief (replacement of business assets): When qualifying business assets are sold and proceeds are reinvested in other qualifying assets, tax on the gain can be deferred until the new asset is disposed of.
- Hold-over relief (gifts of business assets): A gain may be held over when business assets are gifted, provided statutory conditions are met—so tax is not payable until recipient disposes of the asset.
Key Term: business asset disposal relief (BADR)
Relief giving a 10% CGT rate on up to £1 million of qualifying business disposals per individual, subject to qualifying conditions.Key Term: roll-over relief
Defers tax on a gain when qualifying business assets are sold and replaced with new ones, provided replacements are acquired within statutory time limits.Key Term: hold-over relief
Defers CGT on certain gifts of business assets, so the recipient inherits the donor’s base cost and pays tax on total gain when disposing.
Individuals can also use the annual exemption, but this cannot be combined with roll-over or hold-over relief—the exemption only applies when a capital gain is actually charged to tax and payable now.
Key Term: exemption
The part of a gain on which no tax is charged, such as the annual exemption or gains arising on exempt assets.
Worked Example 1.3
Raj sold his shop and reinvested all proceeds in a new trading asset within the required time. Will he pay CGT now?
Answer:
No. Roll-over relief can be claimed, so CGT on the gain is deferred until he disposes of the new asset.
Exam Warning
When clients sell or gift business assets, always check if BADR, roll-over or hold-over relief applies. Do not combine the annual exemption with deferred gains under roll-over or hold-over relief until a disposal triggers a charge.
Tax rates and business asset sales
The CGT rate for business sales is usually:
- 10% on gains qualifying for BADR (up to the lifetime limit)
- 20% on gains above the BADR threshold (for higher-rate taxpayers)
- 18%/28% for gains on residential property, depending on the taxpayer’s income
Calculating CGT for business sales
- Start from the gain after deducting acquisition cost and allowable expenditure
- Deduct any available reliefs (BADR, roll-over, hold-over)
- Deduct the annual exemption (if relief does not defer the gain)
- Tax at the appropriate rate
Owners of partnerships and sole traders are assessed on their fractional share of gains and may claim individual exemptions and reliefs.
Disposal of shares by business owners
Disposing of shares in a trading company may incur CGT if the individual owns at least 5% of the shares and is an employee or officer, and the company is trading. BADR may apply if conditions are met.
Gifts of business assets
Gifting business assets may trigger CGT, but relief (hold-over or roll-over) may defer the charge until the donee disposes of the asset. Transfers on death are normally not chargeable to CGT but may give rise to inheritance tax instead.
Key practical points and exam pitfalls
- Gifts and sales at undervalue are always treated as if made at market value.
- Annual exemption cannot be used now if the gain is deferred under roll-over or hold-over relief.
- Gains on main homes are usually exempt under Principal Private Residence Relief—but this does not apply to business property.
Worked Example 1.4
Maia and Leo are equal partners in a business. They sell a trading property used in the partnership and make a gain of £80,000. How is CGT assessed?
Answer:
Each partner is assessed individually on their £40,000 share of the gain and can claim their annual exemption and any available relief.
Revision Tip
When examining a potential CGT liability, list the type of asset disposed of, the way in which it was disposed of (e.g., sale, gift), who held it, and what reliefs apply. State if the annual exemption or a 10% CGT rate may be available.
Key Point Checklist
This article has covered the following key knowledge points:
- CGT is charged on gains made by individuals and partners, not companies.
- Gains arise on the disposal of chargeable assets, including sales and gifts.
- The basic gain equals disposal value minus acquisition cost and allowable expenses.
- Principal reliefs include BADR, roll-over relief, and hold-over relief.
- The annual exemption can only be used when a gain is taxable now—not when deferred.
- BADR provides a 10% tax rate on up to the lifetime cap for qualifying disposals.
- Partnerships are transparent for CGT: each partner is assessed individually.
- Gifts and sales at undervalue use market value to calculate gains for CGT.
- Shares in a trading company can qualify for relief if conditions are satisfied.
- Gains deferred by roll-over or hold-over relief become taxable when recipient disposes of the asset.
Key Terms and Concepts
- capital gains tax
- chargeable person
- chargeable asset
- disposal
- allowable expenditure
- basic gain
- annual exemption
- exemption
- business asset disposal relief (BADR)
- roll-over relief
- hold-over relief