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Corporation tax on capital gains

Newsletter issue – July 2023

The main rate of corporation tax rose from 19% to 25% on 1 April 2023 for companies with profits over £250,000. The small profits rate of 19% applies where company profits don't exceed £50,000 for the year. Between those profit thresholds an effective marginal rate of 26.5% will apply.
But what happens if the company makes a large profit (capital gain) on selling an asset in the accounting period that straddles 1 April 2023?
The corporation tax rules require the portions of the accounting year which fall in the two financial years: FY22 (commencing 1 April 2022) and FY23 (from 1 April 2023) to be treated as separate accounting periods. The profits of the whole accounting year, including any capital gains, need to be apportioned between those periods falling in FY22 and in FY23.
The thresholds at which the small company rate and marginal rate kick in are shortened according to the length of the deemed accounting period falling in FY23. The thresholds may also be divided by the number of associates a company has, plus itself.
Example:
In the year to 30 September 2023 a property company makes profits from its let properties of £200,000. It also sold a building on 30 April 2023 making a capital gain of £100,000.
The total taxable profits of £300,000 for the year to 30 September 2023 are split across the two accounting periods falling in FY22 and FY23 on a day-count basis:

  • FY22: 182/365 x £300,000 = £149,589 chargeable at 19%
  • FY23 183/365 x £300,000 = £150,411 chargeable at 25%

For FY23 the upper profit threshold is reduced to £125,342 (£250,000 x 183/365), so the property company is not eligible for the small profits rate or marginal relief. Any associated companies would further reduce the upper profit threshold.