How HMRC Treats Fixed Assets in a Business

When a business is bought or sold, the tax treatment of fixed assets is one of the areas that most consistently catches sellers off guard. The way HMRC taxes the disposal of fixed assets, and the way buyers are able to claim relief on their acquisition, affects both the net proceeds received by the seller and the effective cost to the buyer. Getting this wrong, or leaving it unaddressed until late in the transaction, can result in a tax bill the seller was not expecting or a deal structure that is less efficient than it could have been.

This guide explains how HMRC treats fixed assets in a business, the key tax reliefs and charges that apply and what business owners need to understand before going to market.

What fixed assets are for tax purposes

For HMRC purposes, fixed assets are the long-term assets a business uses in its trade rather than holds for resale. They include tangible assets such as plant and machinery, vehicles, equipment, fixtures and fittings and commercial property, as well as certain intangible assets such as goodwill and intellectual property.

The tax treatment of fixed assets varies significantly depending on the type of asset, whether the business is sold as a going concern or as an asset sale, and the legal structure of the selling entity. Understanding which category each asset falls into is the starting point for understanding the tax position.

Capital allowances on plant and machinery

Plant and machinery is the broadest category of fixed asset for HMRC purposes and covers most of the physical assets a business uses in its trade. The tax relief available on plant and machinery is provided through capital allowances rather than through the profit and loss account.

When a business acquires plant and machinery, it claims capital allowances to reduce its taxable profits over time. The main rate pool attracts an annual investment allowance and a writing down allowance of eighteen percent per year on a reducing balance basis. The special rate pool, which covers assets such as integral features of buildings and long-life assets, attracts a writing down allowance of six percent per year.

When those assets are sold, the tax position depends on whether the disposal proceeds exceed or fall below the tax written down value held in the capital allowances pool.

If the disposal proceeds exceed the pool value, a balancing charge arises. This is a tax charge that claws back some or all of the capital allowances that have been claimed, effectively treating the excess as a taxable receipt. If the disposal proceeds are below the pool value and the pool is being closed, a balancing allowance arises, giving the business a final deduction for the remaining unrelieved cost.

In a business sale, this calculation is done at the point of disposal and can produce a material tax charge for sellers who have claimed significant capital allowances over the years and are now selling assets for more than their tax written down value. Sellers should understand their current pool position before going to market, since this directly affects the net proceeds they will receive.

The annual investment allowance

The annual investment allowance allows businesses to deduct the full cost of qualifying plant and machinery purchases in the year of acquisition, up to the current limit of one million pounds per year. This provides immediate full relief rather than the phased relief of the writing down allowance.

For buyers acquiring a business through an asset sale, the annual investment allowance can be claimed on qualifying plant and machinery acquired, which significantly reduces the effective cost of the acquisition. This is one of the reasons that the allocation of purchase price between asset classes matters in a transaction, since the portion of the price allocated to plant and machinery is eligible for this relief in a way that the portion allocated to goodwill or property is not.

Fixtures in commercial property

Fixtures in commercial property occupy a specific position in the capital allowances regime that requires particular attention in business sales. Fixtures are items that are fixed to a building and form part of it, such as electrical systems, heating and ventilation, fitted kitchens and similar items.

The tax treatment of fixtures is subject to the pooling requirement and the fixed value requirement, which were introduced to prevent the same expenditure from generating capital allowances relief more than once in the chain of ownership.

Before a buyer can claim capital allowances on fixtures in a commercial property, the seller must have pooled the expenditure in their own capital allowances computation. If the seller has not done this, the buyer may be unable to claim relief on those fixtures at all.

In practice, this means that when a business sale involves commercial property with significant fixtures, the parties need to agree a joint election fixing the value of the fixtures for capital allowances purposes. This election, known as a section 198 election, must be made within two years of the transaction. Leaving it unaddressed can result in the buyer losing access to capital allowances they would otherwise have been entitled to claim, and it is therefore in both parties’ interests to deal with it as part of the transaction rather than after the fact.

Capital gains tax on fixed asset disposals

Where the disposal of a fixed asset generates a profit over and above the original cost, or the indexed cost in some cases, capital gains tax may apply. The rate depends on the legal structure of the selling entity and the nature of the asset.

For individuals and partners selling business assets, capital gains tax applies to the gain on disposal. The main rate for higher rate taxpayers is twenty-four percent on most assets, though business asset disposal relief, formerly known as entrepreneurs relief, can reduce the effective rate to ten percent on qualifying gains up to a lifetime limit of one million pounds. Business asset disposal relief requires the seller to have held the business for at least two years and to meet other qualifying conditions, and it applies to the disposal of the whole or part of a business rather than to individual asset disposals within an ongoing business.

For companies selling assets, corporation tax applies to chargeable gains rather than capital gains tax. The rate of corporation tax on gains is the same as the main rate of corporation tax applicable to the company, which for most companies is twenty-five percent on profits above two hundred and fifty thousand pounds.

Goodwill and intangible assets

Goodwill occupies a specific position in the tax framework that has changed significantly over the years and continues to involve complexity.

For companies, the tax treatment of goodwill acquired after April 2002 is governed by the corporate intangible assets regime, which generally allows relief for the cost of acquired goodwill to be written off against taxable profits over its useful economic life or at a fixed rate of four percent per year. When that goodwill is subsequently disposed of, the proceeds are taxable as trading income rather than as a capital gain, which affects both the rate of tax and the availability of reliefs such as business asset disposal relief.

Goodwill that predates April 2002, or that was acquired in circumstances that take it outside the corporate intangible assets regime, may be treated differently, and specialist advice is required where there is uncertainty about the history of the goodwill being disposed of.

For individuals disposing of the goodwill of a business, the gain is typically subject to capital gains tax and may qualify for business asset disposal relief depending on the circumstances.

The treatment of goodwill is one of the most frequently misunderstood areas of business sale taxation, and it is one where the difference between an asset sale and a share sale can have a significant effect on the seller’s tax position.

The difference between an asset sale and a share sale for tax purposes

The tax treatment of fixed assets differs significantly depending on whether the transaction is structured as an asset sale or a share sale.

In an asset sale, the seller disposes of the individual assets of the business. Each asset class is taxed separately, capital allowances balancing charges apply to plant and machinery, capital gains tax or corporation tax on gains applies to property and goodwill, and the proceeds are received by the business or the individual as the case may be. The seller then needs to consider how to extract those proceeds in a tax-efficient way.

In a share sale, the seller disposes of their shares in the company rather than the underlying assets. The gain on the shares is subject to capital gains tax at the individual level, and business asset disposal relief may apply if the qualifying conditions are met. The buyer acquires the company including all its assets and liabilities, and the capital allowances position of the assets transfers with the company rather than being reset.

From a seller’s perspective, a share sale is often more tax-efficient because the entire gain may qualify for business asset disposal relief at ten percent rather than being fragmented across multiple asset classes at varying rates. From a buyer’s perspective, an asset sale is often preferable because it allows them to step up the tax base of the assets to the acquisition price and claim fresh capital allowances, whereas a share sale provides no such step-up.

This tension between buyer and seller preferences on deal structure is one of the standard negotiating points in any business sale, and understanding where the tax efficiency lies for each party is essential preparation before entering those negotiations.

Stamp duty land tax on property

Where a business sale includes freehold or leasehold commercial property, stamp duty land tax applies to the property element of the transaction. The rate depends on the value of the property and whether it is freehold or leasehold.

For commercial property, stamp duty land tax is charged at zero percent on the first one hundred and fifty thousand pounds, two percent between one hundred and fifty thousand and two hundred and fifty thousand pounds, and five percent above two hundred and fifty thousand pounds.

Where a business is sold as a going concern and the transfer qualifies as a transfer of a going concern for VAT purposes, it may be possible to structure the transaction so that VAT is not chargeable on the business assets. However, the going concern rules for VAT are specific and technical, and the conditions must be met precisely for the relief to apply. Sellers and buyers should take VAT advice before assuming the going concern treatment will apply.

What sellers should do before going to market

For any business owner preparing to sell, understanding the tax position of the fixed assets before going to market is practical preparation that affects both the asking price and the negotiating position.

The most useful steps are to obtain a clear picture of the current capital allowances pool position and understand what balancing charges will arise on disposal, to take advice on whether business asset disposal relief will be available and whether the qualifying conditions are met, to understand the VAT and stamp duty land tax position where property is involved and to take advice on the most tax-efficient deal structure before entering negotiations rather than after a structure has already been agreed.

Tax advice taken early in the process, before heads of terms are agreed, leaves the seller with genuine options. Tax advice taken after completion can only manage what has already been done.

Final thoughts

The tax treatment of fixed assets in a business sale is not an area where general knowledge is sufficient. The interaction between capital allowances, capital gains tax, the corporate intangible assets regime and the going concern rules for VAT produces outcomes that depend on the specific facts of the transaction and the history of the assets being disposed of.

Sellers who understand their position before going to market are better placed to price their business correctly, to negotiate the deal structure from an informed position and to avoid the unwelcome surprises that arise when tax consequences are discovered after the fact. If you are thinking about selling your business, get in touch with Blacks Brokers and make sure you have the right advisers in place from the start.

Sources

UK Government, Capital allowances: overview (annual investment allowance, writing down allowances and balancing charges):
https://www.gov.uk/guidance/capital-allowances-overview

UK Government, Business asset disposal relief: eligibility and rates (formerly Entrepreneurs Relief, qualifying conditions and lifetime limit):
https://www.gov.uk/business-asset-disposal-relief

UK Government, Corporation Tax: intangible fixed assets (corporate intangible assets regime for goodwill and other intangibles):
https://www.gov.uk/guidance/corporation-tax-intangible-fixed-assets

UK Government, Stamp Duty Land Tax on commercial property (rates and thresholds for commercial transactions):
https://www.gov.uk/stamp-duty-land-tax/commercial-and-mixed-use-property-rates

UK Government, Capital Gains Tax rates and allowances (current CGT rates for individuals):
https://www.gov.uk/capital-gains-tax/rates

HMRC, Capital Allowances Manual (CA26700: fixtures, pooling requirement and section 198 elections):
https://www.gov.uk/hmrc-internal-manuals/capital-allowances-manual/ca26700

UK Government, Transfer of a business as a going concern (VAT going concern conditions and requirements):
https://www.gov.uk/guidance/vat-transfer-of-a-business-as-a-going-concern-toga