At McDade Roberts we help businesses and individual with a range of tax issues. Capital gains tax is one that can take people by surprise so read on for a quick rundown of what you need to know.
A capital gain arises when certain capital (or 'chargeable') assets are sold at a profit. The gain is the sale proceeds (net of selling costs) less the purchase price (including acquisition costs).
What Are The Main Features Capital Gains System?
- Capital gains tax (CGT) is charged at the rate of 10% on gains (including any held over gains coming into charge) where net total taxable gains and income is below the income tax basic rate band threshold. Gains or any parts of gains above the basic rate band are charged at 20% with a few exceptions which are considered in the 'exceptions to the CGT rates section' below.
- Business asset disposal relief (formerly known as Entrepreneurs' Relief (ER)) or Investors' Relief (IR) may be available on certain business disposals.
What Is Business Asset Disposal Relief (BADR)?
BADR may be available for certain business disposals and has the effect of charging the first £1 million of gains qualifying for the relief at an effective rate of 10%.
The relief is available to individuals on the disposal of:
- the whole, or part, of a trading business that is carried on by the individual, either alone or in partnership
- shares in an individual's 'personal company'
- assets used by a business or a company which has ceased within the last three years.
Where an individual makes a qualifying business disposal, relief may also be available on an 'associated disposal'. An 'associated disposal' is a disposal of an asset:
- used in a qualifying company or group of companies of the individual; or
- used in a partnership, where the individual is a partner.
Restrictions on obtaining the relief on an 'associated disposal' are likely to apply in certain specific situations. This includes the common situation where a property is in personal ownership but is used in an unquoted company or partnership trade in return for a rent. Under BADR the availability of relief is restricted where rent is paid. Ownership conditions apply throughout the period up to the date of disposal. For disposals on or after 6 April 2019, the necessary qualifying period of ownership is two years.
The 5% Rule for Company Shareholders
To qualify for BADR, the company needs to be an individual's 'personal company' where the individual must:
- be a company employee or office holder
- hold at least 5% of the company's ordinary share capital; and
- be able to exercise at least 5% of the voting rights.
Careful planning will be required with BADR but if you would like to discuss BADR in detail and how it might affect your business, please do get in touch.
Investors' Relief (IR)
IR is aimed at external investors (other than certain employees or officers of the company) in unlisted trading companies. To qualify for the 10% CGT rate under 'investors' relief' the following conditions need to be met:
- shares must be newly issued and subscribed for by the individual for new consideration
- be in an unlisted trading company, or an unlisted holding company of a trading group
- have been issued by the company on or after 17 March 2016 and have been held for a period of three years from 6 April 2016
- have been held continuously for a period of three years before disposal.
An individual's qualifying gains for IR are subject to a lifetime cap of £10 million.
Share Identification Rules
All shares of the same class in the same company are treated as forming a single asset, regardless of when they were originally acquired. However, 'same day' transactions are matched and there are '30 day' anti-avoidance rules.
CGT Annual Exemption
Every tax year each individual is allowed to make gains up to the annual exemption without paying any CGT. The annual exemption for 2021/22 is £12,300 (£12,300 in 2020/21). Consideration should be given to ensuring both spouses/civil partners utilise this facility.
Exceptions to the CGT rates
The rates of CGT are generally 10% and 20%. However 18% and 28% rates apply for carried interest and for chargeable gains on residential property that does not qualify for private residence relief.
Other Reliefs Which You May Be Entitled To
Many existing reliefs continue to be available, such as:
- private residence relief;
- business asset rollover relief, which enables the gain on a business asset to be deferred until a point in the future;
- business asset gift relief, which allows the gain on business assets that are given away to be held over until the assets are disposed of by the donee; and
- any unused allowable losses from previous years, which can be brought forward in order to reduce any gains.
How McDade Roberts Accountants Can Help
Careful planning of capital asset disposals is essential. We would be happy to discuss the options with you. Please contact us if you would like further advice.