Limited companies are very different from small business and sole traderships, for a lot of reasons. And one of the biggest differences is the way they pay taxes.

Whether you’re starting a limited company from scratch, or incorporating your existing business, it’s crucial to know the ins and outs of your new tax codes. 

This guide will explain how capital gains tax works for limited companies. Specifically, we’ll be covering:

  • What is capital gains tax?
  • Do limited companies pay capital gains tax?
  • What are chargeable gains?
  • How do I calculate chargeable gains?
  • What if I make a loss from selling assets?

What is capital gains tax?

Capital gains tax is a tax you pay when selling (or disposing of) an asset (valuable item) that’s increased in value. You pay the tax on the profit you make when selling the item, not the total amount you sell it for.

Do limited companies pay capital gains tax?

The short answer is no, limited companies don’t pay capital gains tax. Instead they pay corporation tax on any profits made from:

  • doing business (‘trading profits’)
  • investments
  • selling assets for more than they cost (‘chargeable gains’)

Limited companies have to start paying Corporation Tax as soon as they start making a profit. Corporation tax is a flat rate of 19% on all profits.

You register for corporation tax when registering your limited company with HMRC. 

What are chargeable gains?

While limited companies don’t have to pay capital gains tax, they still have to pay tax on ‘chargeable gains’ as part of their corporation tax. Chargeable gains refers to any profits made from selling company assets.

Normally, assets refers to things like:

  • land and property
  • equipment and machinery
  • Shares

Even though it’s a different tax system, limited companies still need to work out the value of their gains to pay tax on them, just like capital gains tax. 

How do I calculate chargeable gains?

To pay the right amount of chargeable gains, you’ld need to figure out how much profit you made from the sale of an asset. 

Normally, it’s just the difference between what you paid for it and what you sold it for, but you can deduct any costs you had to pay in order to sell it, like solicitor’s fees. 

You can also deduct any money you spent improving the asset and adjust for inflation if you had the asset before December 2017.

This sounds more complicated than it is, so let’s look at a step by step guide for an asset bought in March 2001 for £100,000, improved in June 2010 for £10,000, then sold in November 2015 for £200,000.

Work out the asset’s value

This is usually just the amount you sold it for. In this case, £200,000.

Deduct what you paid for it

In this case, £100,000. So deduct it from £200,000 to leave you with £100,000. If it was not acquired in a normal commercial transaction you need to use the market value at the time.

Deduct money for improvements

In this case, £10,000 in June 2010. £100,000 – £10,000 leaves you with £90,000 profits. 

Adjust for inflation

Use the HMRC Indexation Allowance to find inflation rates on:

  • The amount you bought it for in March 2001 (0.509), and multiply it by what you paid for it £100,000 x (0.509) = £50,900.
  • The amount you paid for improvements in June 2010 (0.159), and multiply it by what you paid for improvements. £10,000 x (0.159) = £1590.

Then, take both these figures away from the profit you made from the sale. 

£90,000 – £50,900 – £1590 = £37,510. 

That £37,510 is your chargeable gains from the sale of the asset, and will count towards your corporation tax. 

The inflation allowance rate stops at December 2017, so for any asset you sell after that, just act as though you sold it in December 2017. 

What if I make a loss from selling assets?

Sometimes when you sell your assets, you’ll end up getting less than you paid for it. When this happens, you can declare the loss to reduce the amount of chargeable gains tax you have to pay.

For example, if you’ve sold a piece of machinery for £10,000, but the market value is £20,000, then you can deduct the loss (£10,000) from your chargeable gains, reducing the total amount of corporation tax you’d have to pay. 

You can only deduct the loss from your chargeable gains, not your total taxable profits. And the loss you claim is reduced by any capital allowances you’ve already claimed.

For example, if you’ve already claimed the cost of machinery (£20,000) as a capital allowance, and then sell it at a loss (£10,000), you can’t claim the loss (£10,000) from your taxable income. 

Stay on top of your taxes with Countingup

Financial management can be stressful and time-consuming when you’re self-employed. That’s why thousands of business owners use the Countingup app to make their financial admin easier. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward! 

Find out more here.