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Setting up a limited company & Capital Gains Tax

When setting up a limited company there is a lot as a Director you need to take into consideration, one of which is Capital Gains Tax. This is a tax on the profit or gains you make when you sell or dispose of an asset.

What is Capital Gains Tax?

When setting up a limited company there is a lot as a Director you need to take into consideration, one of which is Capital Gains Tax. This is a tax on the profit or gains you make when you sell or dispose of an asset.
You usually dispose of an asset when you cease to own it - for example if you:

  • Sell it

  • Give it away

  • Transfer it to someone else

  • Exchange it for something else

  • Receive compensation for it - for example, you receive an insurance payout when an asset has been destroyed

It is the gain you make - not the amount of money you receive for the asset - that is taxed.

See example

  • You bought some shares for £2,500 in June 2003

  • You sell them for £12,500 in May 2013

  • You have made a gain of £10,000 (£12,500 less £2,500)

Most assets are liable to Capital Gains Tax when you sell or dispose of them. This applies whether they're in the UK or overseas.

However, some assets are exempt, such as your car, personal possessions disposed of for £6,000 or less and, usually, your main home.

You have an annual tax-free allowance for Capital Gains Tax known as the 'Annual Exempt Amount'.

The Annual Exempt amount for the tax year 2019-20 is £12,000 for each individual/£6,000 for most trustees

Overall gains

If your overall gains for the tax year are above the Annual Exempt Amount, you will pay Capital Gains Tax on the excess. If your overall gains are below the Annual Exempt Amount, you won’t pay Capital Gains Tax.

See overall gains example 

  • Your overall gain in 2019-20 is £12,000

  • The Annual Exempt Amount is £10,900

  • You’ll pay Capital Gains Tax on the excess of £6,000 (£18,000 - £12,000)

For 2019-20 the following Capital Gains Tax rates apply:

Basic rate taxpayer
The rate will depend on the size of your gain, your taxable income and whether the gain is from residential property or other assets.

You will need to:

  • Work out your taxable income – income less personal allowance

  • Work out your total taxable gains

  • Deduct your tax-free capital gains allowance from your total taxable gains

  • Add your taxable gain to your taxable income

  • If the total is within the basic Income tax band you will pay 10% on your gains (or 18% on residential property)

  • If the total is above the basic tax rate you will pay 20% (or 28% on residential property)

Your taxable income (your income minus your Personal Allowance and any Income Tax reliefs) is £20,000 and your taxable gains are £12,300. Your gains are not from residential property.

First, deduct the Capital Gains tax-free allowance from your taxable gain. For the 2019 to 2020 tax year the allowance is £12,000, which leaves £300 to pay tax on.

Add this to your taxable income. Because the combined amount of £20,300 is less than £50,000 (the basic rate band for the 2019 to 2020 tax year), you pay Capital Gains Tax at 10%.

This means you’ll pay £30 in Capital Gains Tax.

If you have gained from both residential property and other assets.

You can use your tax-free allowance against the gains that would be charged at the highest rates (for example where you would pay 28% tax).

Higher rate taxpayer

If you’re a higher or additional rate taxpayer you’ll pay:

  • 28% on your gains from residential property

  • 20% on your gains from other chargeable assets

Entrepreneurs relief

Available on the sale or closure of our Limited company, the rate of Capital Gains tax can be reduced to 10%. To benefit from Entrepreneurs relief conditions apply

  • The shares in your personal company that you are disposing of must be disposed (winding up a company constitutes a disposal) while the company is a trading company or within 3 years from the date it ceased to be a trading company.

  • You must have held 5% or more of the ordinary shares and been a director or employee of the company for the qualifying one-year period.

  • Assets that were in use for your business and were disposed of within the period of three years after the time the business has ceased.

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