Do companies pay Capital Gains Tax?
Capital Gains Tax is not paid by limited companies or unincorporated associations like community groups or sports clubs. Instead, companies pay Corporation Tax, which is another type of payment. It is important that business owners are aware of the difference between certain taxes so that they know which ones they are eligible to pay.
What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax paid by self-employed traders and those in business partnerships. It is also paid by individuals who have sold particular assets for more than £6000 such as:
- Second properties (but not your main home), properties that have been inherited and valuable personal possessions such as jewellery and antiques (but not cars).
- Shares that are not in an ISA or PEP.
- Business assets like land and buildings, trademarks and fixtures and fittings.
CGT is essentially a tax on profit (your ‘gain’), which is the difference between what you paid for an asset and what you sold it for. At the same time, there is a figure called the ‘tax-free allowance’ which for the financial year 2016/17 stands at £11,100 and increases to £11,300 in 207/18. You pay CGT on gains which lie above this figure.
There are different rates of CGT depending on the type of asset you have gained from. You can work out which rate of CGT you have to pay from this page. If you pay the basic rate of income tax you pay CGT at 10% (18% if you are selling residential property that is not your main home). If you fall into the higher rates of income tax you pay at 20% (28% if you are selling residential property that is not your main home).
What is Corporation Tax?
Corporation Tax (CT) is a tax which all limited companies, those foreign companies which have branches or offices in the UK and clubs and other incorporated associations are liable to pay. Like CGT it is a tax on profit (‘gain’) accrued through selling assets and otherwise doing business. CT may be termed the ‘company version’ of CGT.
Unlike with CGT, from April 2015, the rates of CT are the same, irrespective of how much profit your company makes. The rate of CT is set at 20% for 2016/17 reducing to 19% in 2017/18. You can work out how much CT you are liable to pay against your profits here. There are various types of allowances and relief schemes available for corporations which may cut their CT. For example, capital allowances are made if you buy items to use in your business, like equipment and machinery. Capital allowances are also made for intellectual property like patents or research and development. There are also corporation reliefs for companies involved in the creative arts (theatre, film, television, video games), and the Indexing Allowance caters for the effect of inflation when reporting capital gains. Accounting firms will help in interpreting these. The various allowances and reliefs from Corporation Tax can be found here.
Upon their establishment, companies must register for Corporation Tax. Subsequently, it is vital that companies keep adequate records so that they can assess their gain and then fill in a company tax return form detailing how much CT they have to pay.
CGT and CT are taxes which do similar things – they tax the profit achieved by both individuals and companies. CGT is more flexible in its rates which accord with those of income tax whereas CT has, since April 2015, been a flat percentage of 20% on corporate profit, although for the financial year 2017/18 it reduces to 19%, and in 2020 it is reduced further to 17%.
Companies pay Corporation Tax while those who are self-employed or in a business partnership pay Capital Gains Tax. It is important that business owners are aware of the type of tax they are liable to pay and, further, that they maintain detailed records such that they can calculate their own tax or else pay an accounting firm to do it for them.