Capital Gains Tax on Commercial Property: What You Need to Know

What is Capital Gains Tax on Commercial Property?

CGT on commercial property is charged on the profit made when you sell or dispose of a property that has increased in value since you purchased it. Unlike residential property, commercial property does not benefit from Private Residence Relief, so the entire gain is usually taxable.

Understanding the rules, allowable deductions, and potential reliefs is key to accurately calculating your CGT liability and reducing the amount payable.

How is Capital Gains Tax Calculated on Commerical Property?

To calculate CGT on commercial property, the following steps can be taken:

1. Determine the Gain: The gain is the difference between the disposal value (e.g., sale price) and the acquisition cost (e.g., purchase price), minus any allowable expenses.

2. Deduct Allowable Costs: You can deduct costs such as legal fees, stamp duty, valuation fees, and improvement costs (e.g., structural renovations).

3. Apply the Annual Exemption Allowance: For the 2025 tax year, individuals can offset the first £3,000 of gains against CGT.

Example: If a commercial property has a purchase price of £500,000 and a sale price of £700,000, with allowable costs of £20,000 the gain will be calculated as £700,000-£500,000 -£20,000 = £180,000.

Therefore, the taxable gain after the £3,000 allowance would be £177,000.

Capital Gains Tax Rates for Commercial Property in the UK

The rate of Capital Gains Tax for commercial property and other assets that are not residential property will depend on the date on which the disposal of the asset took place.

Up to and including 29th October 2024, disposals of these assets were taxed at 10% at the basic rate and 20% at the higher rate.

From 30th October 2024 onwards, these assets are charged at 18% at the basic rate and 24% at the higher rate, aligning the rates to the same rates as residential property.

There are further rules and rates for gains from "carried interest" which we deal with in this article.

Reliefs and Deductions for Capital Gains Tax on Commercial Property

Several reliefs may reduce your CGT liability on commercial property transactions:

• Annual Exemption Allowance: Offset the first £3,000 of gains for the 2024 tax year.

• Business Asset Disposal Relief (BADR): Formerly Entrepreneurs' Relief, BADR allows qualifying gains to be taxed at a reduced rate of 10%. This applies if the commercial property is used for business purposes and certain conditions are met.

• Rollover Relief: If you reinvest the proceeds from the sale of a commercial property into another qualifying business asset, you can defer CGT liability.

• Loss Relief: If you incur a loss on the disposal of a commercial property, this loss can be used to offset gains from other assets in the same tax year or carried forward to future years.

Consulting a tax advisor can help you identify which reliefs apply to your circumstances.

Reporting Capital Gains Tax on Commercial Property

You must report and pay CGT on the sale of a commercial property to HMRC. Key reporting requirements include:

Reporting Timeline: For non-residential property, gains must be reported by the deadline of your Self-Assessment Tax Return.

Documentation: Keep detailed records of the property purchase, sale, associated costs, and any improvements made.

Failure to report gains accurately and on time can result in penalties and interest charges.

Frequently Asked Questions About Capital Gains Tax on Commercial Property

Q: Do I pay CGT if I transfer a commercial property to a family member?

A: Yes, CGT is due on the market value of the property at the time of transfer, even if no money changes hands.

Q: Can I avoid CGT by reinvesting the proceeds from a sale?

A: You may qualify for Rollover Relief, which allows you to defer CGT if you reinvest the proceeds into another qualifying business asset.

Q: Are there special rates for commercial properties used in a business?

A: If the property qualifies for Business Asset Disposal Relief, gains may be taxed at a reduced rate of 10%.

Q: Does VAT affect my CGT calculation?

A: VAT is not considered part of the gain calculation but may affect the overall transaction cost. Ensure you account for VAT correctly when determining allowable expenses.

Q: How does HMRC know about my property transactions?

A: HMRC receives information from conveyancers, estate agents, and other third parties. Failing to report gains accurately can lead to investigations and penalties.

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