COMPANY ASSETS: There is more than one tax-efficient reason to sell, or ‘dispose of’, a business asset.
But, there are several key factors for company directors to be aware of before selling some, or all, of the assets that belong to the company.
As a rule, all limited companies pay Corporation Tax. It becomes liable on profit gained from selling (or disposing of) company assets, such as:
- Equipment and machinery
- Land and property
So, if you need to pay Corporation Tax when you sell business assets, why would you sell them? There are several valid reasons. It could be that the item is no longer required. It is also a practical way of generating extra capital.
Different Kinds of Business Assets
A business asset can be tangible (e.g. equipment). It can also be intangible (e.g. brand reputation, goodwill, or types of intellectual property).
Business assets are items purchased either ‘exclusively’ or ‘primarily’ for business use. They can also get divided as current or non-current for corporate taxation purposes.
In simple terms, current assets are items which could get turned into cash within one year (e.g. inventory). Non-current assets are items which would be expected to provide value for more than one year (e.g. equipment, land, and property).
Who Pays Corporation Tax on ‘Chargeable Gains?
- UK-resident limited companies
- The majority of ‘unincorporated associations‘ (e.g. co-operatives, sports clubs)
- Limited companies registered abroad with a United Kingdom branch or office (e.g. Amazon, Facebook)
Working Out and Reporting Gain
You can work out the gain (or loss) using a calculation (see below). The outcome will determine whether you need to pay taxes at the current Corporation Tax rate.
When to Pay Capital Gains Tax (instead)
There are certain situations whereby you would pay Capital Gains Tax for business assets (not Corporation Tax) such as if:
- You are a self-employed sole trader or one of the partners in a business partnership.
- It is not a UK-resident company, controlled by no more than five (5) people, and made the chargeable gain on UK residential property.
Note: Different rules apply for intangible assets like business reputation and intellectual property (see below).
Calculating a Chargeable Gain
It would be unusual to sell an asset for exactly the same price that you originally paid for it. Thus, the gain (or the loss) is the difference between the price you paid for the asset and the price you sold it for.
There are times when you must use the market value instead. This rule would apply if the business ‘gifted’ the asset or sold it for less than its true value (e.g. to help the buyer).
Note: You would be able to deduct certain costs in the workings such as solicitor fees or Stamp Duty.
Assets Purchased before December 2017
The calculation changes if you had the asset before December 2017. Instead, calculate how much you would have paid for the asset in today’s money before working out the gain.
You should use HM Revenue and Customs Indexation Allowance for this part of the process. The allowance makes the gain smaller which means you would pay less tax.
5 Steps for Working Out Chargeable Gain
- Determine the value of the asset value when you sold it. As a rule, this amount is what your company received as the payment.
- Deduct the amount that your company paid for the asset. It may not have been in a normal commercial transaction. In this case, you must use the market value at the time you bought it.
- Your company may have spent other monies to buy, sell, or improve the asset. Typical examples include fees for a solicitor or Stamp Duty. You can deduct the money paid for this – but not for maintenance costs.
- Use HMRC Indexation Allowance rates for the month your company sold the asset if you had it before December 2017. You must determine the ‘inflation factor’ for the year and the month your company bought the asset. Multiply this factor by the amount that you paid for the asset. Then, you can deduct the total figure from the profit.
- The final step is working out the effects of inflation if you made improvements to the asset. Calculate this figure in the same way and then deduct the total figure from the profit.
You have now worked out the chargeable gain on sold business assets. In fact, you can also ask HM Revenue and Customs to check the valuation.
Fill in the ‘SAV: post-transaction valuation checks for capital gains (CG34)‘ form. Send it to the address written on the form and you should get a response from HMRC after eight weeks.
Making a Loss When Selling a Business Asset
You can also deduct any capital losses to reduce the total chargeable gains. The amount you claimed as capital allowances when selling an asset reduces the loss that you can claim.
Note: You can only deduct the capital losses from the chargeable gains. They must not get deducted from the trading income or from other profits.
Corporation Tax and Intangible Assets
Intangible assets relate to intellectual property and your work. They include things like the business reputation or ‘goodwill’. The way you get taxed on gains made from intangible assets would depend on when they were first owned by your limited company.
After the 31st of March 2002
Did your company acquire or create them after the 31st of March 2002? If so, you should include the gains on intangible assets in your company business income (trading profits). Thus, you would pay Corporation Tax on the trading profits.
Note: Company intangible assets can also come from a change in business structure. Examples would be after starting a business partnership or becoming a self-employed sole trader. In this case, you should use the date that you acquired or created the assets before the change in the business structure.