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A Tradesperson's Guide to Keeping More of Your Hard-Earned Cash - Capital Gains tax

Rhino Trade Insurance 07 May 2024

You might usually be more comfortable with pipes, planks, and paint than with tax codes and financial jargon. But guess what? Today, we're diving into the financial deep end to talk about something that might make you squirm a bit - Capital Gains Tax. Fear not, though; we're breaking it down in true tradesperson style - no-nonsense, straight to the point, and with a cuppa in hand.

What on Earth is Capital Gains Tax?

So, what's the deal with Capital Gains Tax? In simple terms, it's the tax you pay when you sell or get rid of an asset that's increased in value. Now, we get it - you're thinking, "How does this affect me?" Well, hold onto your tool belts, because it can hit closer to home than you think.

Picture this: you've been hustling, putting in the hours, and building your trade empire - whether it's a plumbing business, a roofing venture, or a sparky haven. Along the way, you've likely invested in tools, equipment, or maybe even some property. Now, if the value of those investments has gone up, Capital Gains Tax could come knocking when/ if you decide to cash in.

The Nitty-Gritty for Tradespeople

As tradespeople, your tools and equipment are your bread and butter. The good news is that HMRC generally considers these tools as trading stock rather than assets. This means that if you ever want to sell your trusty toolkit to a newbie in the business, you might not have to worry about Capital Gains Tax. But, and there's always a but, if you've got some high-value equipment or other assets on the side, like a second van or a storage shed, Capital Gains Tax could come knocking.

The good news is that not every transaction triggers Capital Gains Tax. It typically applies to the sale of:

  • Property: If you're a builder and flip houses or have a second property, Capital Gains Tax could be in the cards.
  • Business Assets: Your prized possession - that trusty van, your top-notch tools, or any other business asset that has gone up in value.
  • Investments: If you've dabbled in stocks, bonds, or other financial investments, you might be on Capital Gains Taxes radar when cashing in those gains.

Before you start counting your hard-earned pounds, let's talk about the exemptions. The good folks at HMRC (His Majesty's Revenue and Customs) have a heart, too. Here are a few scenarios where Capital Gains Tax might not play a role:

  • Main Residence: If you sell your primary residence, you won't have to pay Capital Gains Tax. There are certain conditions and exceptions, but generally, it's a win for homeowners.
  • Private Cars: Fear not, van enthusiasts! The sale of your trusty tin workhorse is usually exempt from Capital Gains Tax. No need to say goodbye to your mobile office with a heavy heart.

The Business Side of Things

As a tradesperson, you might have invested time and money into building your business. The good news is that some of these business assets can be eligible for Entrepreneurs Relief (now known as Business Asset Disposal Relief). This sweet deal can significantly reduce your Capital Gains Tax liability when you decide to hang up your toolbelt and sell your business. However, rules can be a bit tricky, so it's essential to seek professional advice to make the most of this relief.

The Devil in the Details - Calculating Capital Gains Tax

Alright, let's get down to brass tacks - how is Capital Gains Tax actually calculated? Fear not; it's not as complex as assembling that flat-pack wardrobe everyone dreads. The basic formula is simple: Capital Gains Tax is based on the profit you make from the sale of an asset minus any allowable deductions. Allowable deductions can include the cost of acquiring and improving the asset, as well as any selling costs like estate agent fees.

Annual Exemption - Your Get-Out-of-Tax-Free Card

Just like in a game of Monopoly, everyone loves a 'Get Out of Jail Free' card. In the world of Capital Gains Tax, that card is the Annual Exemption. For 2023/24, individuals have an annual Capital Gains Tax exemption of £6000 - a certain amount of profit you can make from asset sales without paying a penny in Capital Gains Tax. From 2024/25, this is supposed to be halved to £3000. 

Think of the annual exemption like the taxman giving you a free pass up to a certain limit. Just be sure to check the current exemption limit, as tax laws can always change.

Some Final Points

Timing is Everything - When to Sell (and When Not to)

Picture this: you've just finished a big job, and the client is thrilled with your work. You're contemplating selling some assets and making a sweet profit. But hold your horses! The timing of your asset sales can have a clear impact on your Capital Gains Tax liability. Planning is key. If you're considering selling assets, it might be worth chatting with a tax expert to strategise and minimise your bill.

Inheritance and Capital Gains Tax - A Tough Issue

Now, let's touch on a somewhat sensitive topic - inheritance. While the passing down of assets can be a heartwarming gesture, Capital Gains Tax can cast a shadow on the proceedings. In the UK, inheriting assets is generally not subject to Capital Gains Tax. However, when you decide to sell those inherited assets, Capital Gains Tax may come into play. The rules surrounding inherited assets can be complex, so it's wise to seek professional advice to navigate this thorny issue.

Keep Your Records in Shipshape

As a tradesperson, you're probably no stranger to keeping meticulous records of your jobs, expenses, and invoices. Well, the same applies to Capital Gains Tax. Maintaining detailed records of the acquisition, improvement, and sale of your assets is crucial. This information will be your lifeline if HMRC comes knocking. With accurate records, you can confidently demonstrate your Capital Gains Tax calculations and ensure you're not paying a penny more than necessary.

Concluding Capital Gains Tax For Tradespeople

There you have it, tradespeople of the UK - a crash course in Capital Gains Tax tailored just for you. 

While tax might not be the most thrilling topic, understanding its ins and outs can save you a substantial amount of your hard-earned cash in the long run. Tax rules can be complex, and the last thing you want is to find yourself on the wrong side of the taxman. A tax professional can help you navigate the intricacies, maximise available reliefs, and ensure you're not overpaying on your Capital Gains Tax.

So, as you continue to conquer leaks, fix electrical faults, and turn houses into homes, don't forget to keep one eye on the latest tax developments. With a bit of know-how and some strategic planning, you can ensure that the fruits of your labour stay where they belong – in your pocket! And for any trade insurance needs, give us a call at 0116 243 7904. 

About The Author Phil McCormick

Experienced in brand marketing and content. Most of that lovely communication you see online will be from Phil. social media, emails, videos, how to make a bacon sarny? You get the gist!

Trade most identified with: Electrician - It’s our Phil’s job to map out all our communications and make sure the signal works! Also, he’s one of the cockiest blighters in the team so electrician fits perfectly!

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