When a limited company sells one of its business assets, there are different rules compared to those of when the asset is being sold by an individual.
How the basics are different
First of all, once the gain has been calculated, it is added to the rest of the company’s profits for corporation tax. All of the company’s profits and gains are then charged at the same rate for tax.
Companies also don’t have the benefit of an annual exempt amount like individuals have, meaning all of the gains for the year are liable for corporation tax.
Another big difference to individuals is that limited companies can get what is called an indexation allowance. This allowance is to counteract the effects of inflation for assets that were bought for what was a lot of money at the time of purchase, but are sold recently when the original cost would not seem as high.
The calculation of indexation allowance involves the use of a series of tables that can be found by clicking here. To calculate the indexation allowance you would first choose the table that represents the month you sold the asset. On the table you would find the month in which you first acquired the asset. The next step is to multiply the asset cost with the value you have found on the table, for example if you have a cost of £1,000 and the number in the table is 0.5, you multiply the £1,000 by 0.5 to get £500 for your indexation allowance.
Once you have the indexation allowance, it is subtracted from the remaining gain after you have subtracted the cost and any selling expenses from the proceeds. With the above example, if you have proceeds of £5,000 and the cost of £1,000 with an indexation allowance of £500, you take £5,000, subtract £1,000 and then subtract a further £500 for the indexation allowance, giving a gain of £3,500 instead of £4,000.
While it can reduce the gain from the sale of an asset by a limited company, it cannot turn a gain into a loss or increase a loss that is already there. Therefore if the gain is reduced to nil or less, you treat the gain as nil, if you had a loss, then you do not apply the indexation allowance at all.
Individuals and sole traders cannot use indexation allowance, only incorporated companies such as a limited company can take advantage of it.
Indexation allowance tables change on a regular basis so please be sure to check the correct tables when calculating your indexation allowance. All of the tables can be found here.
If you would like any advice or assistance with the above, please do not hesitate to contact us to see how we can help.