What is Capital Gains Tax?

Selling a business marks a significant milestone for any entrepreneur, often representing the culmination of years or even decades of effort, substantial investment, and unwavering dedication. It is a complex journey that, if navigated successfully, can provide immense financial rewards and personal satisfaction. However, one critical area that demands considerable attention—and which can notably impact the financial success of the sale—is Capital Gains Tax (CGT). 

Within the UK, CGT specifically applies to the profit made when selling or disposing of assets, including entire businesses or shares within businesses. Gaining a clear understanding of the intricacies of CGT, its calculation, potential liabilities, and available reliefs, can greatly determine whether you achieve a profitable, satisfying exit or encounter unexpected financial disappointment.

What is Capital Gains Tax?

Capital Gains Tax is a specific form of taxation applied by HM Revenue & Customs (HMRC) to the profit realised from selling or disposing of an asset that has appreciated in value since its original purchase. For business owners in particular, CGT typically applies to the sale of the entire business entity or the sale of shares held within that business.

The taxable amount is determined by calculating the difference between the initial acquisition price (including all allowable associated expenses) and the eventual sale price achieved. Although this fundamental principle sounds straightforward in theory, the UK tax system is filled with complexities and nuances. It encompasses numerous rules, exceptions, allowances, reliefs, and regulations—each capable of significantly influencing the ultimate tax outcome for business sellers.

How Does CGT Apply When Selling a Business?

When you decide to sell your business, the CGT is charged strictly on the realised gain rather than on the total sale price itself. To calculate your gain correctly, you must first establish a clear and accurate cost base. This cost base should include not only your original purchase price but also subsequent investments, capital expenditures (such as property improvements, new equipment, or technology), and any allowable business-related expenses incurred over the lifetime of your ownership.

Once you have this detailed cost base, you subtract it from your eventual selling price. Crucially, expenses directly related to the sale process itself—such as professional advisory fees, legal expenses, valuation costs, brokerage fees, and advertising and marketing expenses—can be deducted. The meticulous recording and substantiation of these expenditures can significantly reduce your overall CGT liability, potentially saving you substantial sums of money.

Do I need to declare capital gains to HMRC?

Yes, you are required to declare capital gains to HM Revenue and Customs (HMRC) in the United Kingdom if you have made a profit on the sale of assets, such as property or shares, that are not exempt from capital gains tax. You should report these gains on your Self Assessment tax return, and pay any tax owed by the January 31st deadline following the end of the tax year in which the gain was made.

How do HMRC know about capital gains?

HM Revenue and Customs (HMRC) typically knows about capital gains through self-assessment tax returns and reporting requirements. UK residents are required to report and pay tax on their capital gains, and this information is used to calculate the tax owed. In addition, HMRC has access to information from a variety of sources, including banks and other financial institutions, to help ensure that capital gains are accurately reported.

Do I need an accountant to pay capital gains tax?

No, you do not necessarily need an accountant to pay capital gains tax. However, an accountant may be helpful in certain situations, especially if you have complex financial circumstances or are unsure about how to calculate your capital gains tax liability. An accountant can help you determine your tax obligations, complete and file your tax returns, and ensure that you are following all the relevant tax laws and regulations. Additionally, an accountant may be able to help you minimize your tax liability by finding deductions and other tax-saving strategies. Ultimately, whether or not you need an accountant will depend on your individual circumstances and level of financial expertise.

The Current UK Capital Gains Tax Rates

The rates at which CGT is charged in the UK vary depending on the taxpayer’s income and the specific type of asset sold. Significant changes to CGT rates were introduced in the Autumn Budget 2024, affecting disposals made on or after 30 October 2024. For the 2025/2026 tax year, the main CGT rates are:​

• Basic Rate Taxpayers: 18% on gains from most assets.​
• Higher and Additional Rate Taxpayers: 24% on gains from most assets.

It’s important to note that these rates apply to gains from assets such as shares and business assets. Gains from residential property continue to be taxed at 18% for basic rate taxpayers and 24% for higher rate taxpayers.

However, it is crucial to note that business disposals often fall under a unique categorisation with special reliefs and allowances available. This specialised approach to business assets can notably lower the effective CGT rate, significantly improving the overall profitability of a business sale. Understanding and properly applying these rates and reliefs demands specialist tax planning and expert guidance.

Business Asset Disposal Relief (BADR) Explained

Formerly known as Entrepreneurs’ Relief, Business Asset Disposal Relief (BADR) is arguably the most beneficial CGT relief available to UK business owners considering a sale. BADR allows eligible individuals to pay CGT at the substantially reduced rate of just on the first £1 million of lifetime gains made through qualifying business disposals.

The rates are as follows;

• Up to 5 April 2025: Qualifying gains are taxed at 10%.​
• From 6 April 2025 to 5 April 2026: The rate increases to 14%.
• From 6 April 2026 onwards: The rate rises further to 18%.​
  

The lifetime limit for BADR remains at £1 million. 

The lifetime limit is available to each shareholder, so shares owned by a husband and wife both would have the £1m available for BADR, so in effect a cumulative £2m limit. There is no limit to the amount of times you can claim BADR up to a cumulative gain of £1 million, so you can reach the limit in one sale or multiple over many years, but once you reach the £1m limit it is used up and gone.

This relief can significantly enhance your final proceeds from selling a business, making it imperative to assess your eligibility carefully and ensure compliance with its specific criteria.

In order to obtain this benefit you must meet HMRC’s qualifying conditions and each individual is subject to their own lifetime limit.  You can qualify for BADR if you are:

• Selling all or part of your business
• Selling shares or securities
• Selling assets you lent to the business
• Members voluntary Liquidation

You cannot claim BADR on the disposal of property. However, if you dispose of your company as a whole, and it holds a property this is allowable.

Additionally you must meet several strict conditions also:

• You must have continuously owned the business or relevant shares for a minimum period of two years before the disposal date.
• The company must be a “personal business” which means that you must have at least 5% of both the company’s shares and voting rights. Additionally, you must be entitled to at least 5% of the profits.
• You must have been actively involved in the company either as a director, officer, or employee throughout this two-year qualifying period.
• The business itself must demonstrably qualify as actively trading throughout the two-year period immediately preceding the sale, rather than merely holding investments or passive assets.

Any failure to meet even one of these criteria could result in ineligibility for BADR, thus potentially leading to a significantly higher CGT liability. This underscores the importance of seeking specialist advice early in the sale preparation process and maintaining meticulous records to evidence compliance with these conditions.

Understanding and Leveraging the Annual CGT Allowance

Every taxpayer in the UK is entitled to an annual tax-free Capital Gains Tax allowance—referred to as the Annual Exempt Amount. For the 2025/2026 tax year, this allowance is set at £3,000. While this allowance may initially appear modest, careful strategic planning can enable business sellers to leverage it effectively.

Furthermore, married couples or civil partners may utilise each other’s unused allowances effectively by transferring assets between themselves prior to disposal, thus further lowering their overall tax liability.

Minimising Your CGT Liability: Key Strategic Approaches

Several proven strategies can help minimise the CGT payable upon a business sale. First, planning the timing of the sale can be crucial—spreading gains across different tax years to utilise multiple annual exemptions can significantly reduce tax obligations. Additionally, offsetting any capital gains against capital losses incurred from other investments within the same tax year can also minimise the taxable gain and, consequently, CGT payable.

Asset transfers between spouses or civil partners can also be a beneficial strategy, as such transfers are usually exempt from CGT, allowing the utilisation of two separate CGT annual allowances rather than just one. However, these transfers must be genuine and properly documented, making professional guidance vital to ensure full compliance with HMRC regulations.

Practical Steps to Prepare for CGT When Selling Your Business

Advance preparation is essential when approaching the sale of your business. Keeping precise, comprehensive records of all business-related investments, improvements, and operational costs is critical in justifying your CGT cost base to HMRC.

At Dexterity Partners, our dedicated team specialises in assisting business owners with comprehensive sale preparation. By combining meticulous CGT planning with strategic commercial advice, Dexterity Partners ensures optimal tax efficiency and maximises your financial return. Our unique integrated service model, backed by our specialist legal partner, 3Volution, guides you seamlessly through each stage of the sale process—from meticulous pre-sale preparation and buyer identification, right through to negotiation, due diligence, and successful completion.

Negotiation and Structuring to Optimise CGT Outcomes

It’s vital to recognise that negotiation during the sale process extends beyond simply securing a strong headline sale price. The chosen sale structure—such as an asset sale, share sale, or earn-out arrangement—can significantly influence your CGT obligations and thus the net proceeds you receive.

Generally, share sales can be particularly advantageous for CGT purposes, primarily due to favourable qualification conditions for BADR and other reliefs. However, every business sale presents unique characteristics and challenges, necessitating careful and tailored structuring advice.

At Dexterity Partners, our expert team is adept at structuring transactions that not only deliver excellent financial terms but also significantly mitigate potential tax liabilities. Our negotiation expertise ensures the chosen deal structure aligns seamlessly with your individual tax planning strategy and long-term financial objectives.

Conclusion: Expert Guidance Is Essential for CGT

Navigating the complexities of Capital Gains Tax during a business sale requires expert knowledge, detailed preparation, and sophisticated planning. Engaging specialist advisers early can profoundly influence your tax position, ensuring you retain the greatest possible proportion of your hard-earned business proceeds.

At Dexterity Partners, our integrated approach combines expert tax planning, commercial negotiation, and dedicated legal support through 3Volution to provide a comprehensive and seamless transaction experience. By thoroughly preparing and managing every aspect of the sale process, we ensure that our clients achieve optimal outcomes, both financially and personally—allowing you to move confidently into the next rewarding chapter of your professional and personal life.

Capital Gains Tax FAQ’s

What is Capital Gains Tax (CGT)?

Capital Gains Tax is a tax applied to the profit (or gain) made when you sell or dispose of an asset, such as a business or shares, that has increased in value since you first acquired it.

 

Do I have to pay CGT when selling my business?

In most cases, yes. If your business or its shares have increased in value since you acquired them, you’ll likely face a CGT liability on the gain made upon sale. However, certain reliefs and allowances can significantly reduce this tax liability.

 

How is Capital Gains Tax calculated on a business sale?

CGT is calculated based on the difference between your sale price and the original acquisition cost, after deducting allowable expenses. Allowable expenses typically include professional fees, valuation fees, marketing costs, and legal expenses directly related to the sale.

What are the CGT rates for selling a business in 2025/2026?

For the tax year 2025/2026, the rates for Capital Gains Tax on business assets and shares are:

• 18% for basic rate taxpayers.
• 24% for higher and additional rate taxpayers.
  

It’s important to note that these rates differ from previous tax years and could change again in the future.

 

What is Business Asset Disposal Relief (BADR), and who qualifies?

Business Asset Disposal Relief, previously known as Entrepreneurs’ Relief, offers a reduced CGT rate on qualifying gains from business sales. From April 2025, the rate is changing:

• Up to 5 April 2025: 10%
• 6 April 2025 to 5 April 2026: 14%
• From 6 April 2026 onwards: 18%

To qualify, you must have owned the business or shares for at least two years and been actively involved as an employee, director, or office holder. The relief applies to a lifetime limit of £1 million in gains.

What is the Annual Exempt Amount (AEA) for CGT?

The Annual Exempt Amount is the amount of capital gain you can realise each tax year without paying CGT. For the 2025/2026 tax year, the allowance is £3,000 per individual. Planning your sale strategically can help maximise this allowance.

Can I reduce or avoid paying CGT when selling my business?

While completely avoiding CGT is difficult, there are several legitimate strategies to reduce your liability significantly, including:

• Timing your sale to benefit from available allowances or lower tax rates.
  Transferring assets to a spouse or civil partner to double your AEA.
• Offsetting capital gains with any capital losses from other investments.
• Making pension contributions to potentially lower your taxable income.

When is CGT payable after selling a business?

CGT arising from the sale of a business is payable by 31 January following the end of the tax year in which the sale occurred. For instance, if you sell your business during the 2025/2026 tax year (ending 5 April 2026), the tax is due by 31 January 2027.

Why is professional advice recommended when dealing with CGT on business sales?

CGT rules and rates can be complex, and recent changes mean professional guidance is more important than ever. Specialist advisers like Dexterity Partners can help you navigate the complexities, identify tax-saving opportunities, and structure your business sale to ensure the best possible financial outcome.