If you think you’ve happened on the next big idea, and your start-up is going to be worth a fortune in four or five years’ time, you’ll no doubt already have thought about your exit strategy; when you’re going to exit, how much money you’re going to demand, and what sort of things you need to do before you complete the sale.
Capital gains tax (CGT), if not handled properly, could present a huge obstacle to your plans. CGT is, essentially, a tax on profits and exit sales, so you’ll be liable whenever you come to sell your business on. You may also have to pay up when you sell assets such as offices, furniture and trademarks; even the goodwill built up by your company could ultimately be taxable.
Everything, it seems, comes under the CGT umbrella. Shares bought low and sold high are counted as capital gains by the taxman, as is money received in compensation. Then you have to consider personal possessions, such as jewellery, artwork or antiques, which have been inherited or bought for a pittance before being sold on for profit.
As you can see, CGT is a potential minefield for any entrepreneur. But, before you descend into panic, bear in mind that the tax is based purely on profit, and does not consider overall sale prices. So if you bought a house for £240,000 and sold it for £260,000, you’ll only need to pay tax on the £20,000 gain – not the whole £260,000!
How it’s worked out
First of all, it’s worth bearing in mind that CGT is a net figure; if you’ve recorded profits on some things, but losses on others (a pattern familiar to most investors), you’ll need to subtract one from the other – this will give you the amount of CGT you’re liable for.
Here are the basic rates:
Entrepreneur’s Relief carries a maximum lifetime allowance of £10m – so, if you sell several businesses in multi-million pound deals over your business life, you’ll only get Entrepreneurs’ Relief on the first £10m you make.
To qualify for Entrepreneur’s Relief, you must have owned at least 5% of the company, or the voting rights for the past twelve months; you must be an individual, as opposed to a company; and you must work as an officer, or employee of the company.
If you want to get more information about the various rates available, visit the HMRC website - this should give you the information to calculate your CGT liability.
Loopholes and exemptions
A number of personal transactions carry no CGT liability; for example, profits from your family home, or your main car. Similarly, you don’t have to pay CGT on the money you receive from ISAs, pensions, or government bonds, the windfall you receive from a bet or lottery, or the compensation you receive from personal injury.
You can avoid CGT by transferring assets to your spouse (although please note that you’ll need to pay the tax on gifts transferred to your children), or funnelling profits into an Enterprise Investment Scheme.
Finally, you can cut your CGT bill by making the odd small loss – so if you’re struggling to get rid of one of your properties at a decent rate, or you have shares in a firm which is struggling, you could achieve an overall gain by selling at a low rate – and slashing your tax liability in the process.
How to pay it
As an entrepreneur, it can be fiendishly difficult to keep track of your tax obligations, and this problem is particularly relevant when it comes to CGT. To avoid getting yourself in a muddle, it’s best to keep a note of the profit, or loss, made each time you get rid of an asset. By making a note of each specific case, you can keep a clear track of your overall CGT liability – and avoid the stress of working it all out at the last minute.
When you come to record your gains and losses, you’ll need to make a separate note of each gain/loss on a self-assessment tax form. Every instance of profit or loss, no matter how small, needs to be included. When filling out your self-assessment form, you’ll need to include the following information: