Corporation Tax Self Assessment

Capital Gains Tax

In this section, we explore the taxation of capital gains and the various reliefs that may be available. If you reside in the Nottingham area, AH Accountants is here to offer expert taxation advice to help you maximize the reliefs applicable to capital gains tax.

A capital gain occurs when certain capital (or ‘chargeable’) assets are sold for a profit. The gain is calculated as the sale proceeds (after deducting selling costs) minus the purchase price (including any acquisition costs).

Key Features of the Current System

Capital gains tax (CGT) is levied at a rate of 10% on gains (including any held-over gains) when the total net taxable gains and income are below the income tax basic rate band threshold. Any gains exceeding the basic rate band are taxed at 20%, with a few exceptions detailed in the ‘Exceptions to the CGT rates’ section below. Additionally, reliefs such as Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief) and Investors’ Relief (IR) may apply to certain business disposals.

Business Asset Disposal Relief (BADR)

BADR may be applicable for certain business disposals, allowing the first £1 million of qualifying gains to be taxed at an effective rate of 10%. This relief is available to individuals when disposing of:

• The whole or part of a trading business that the individual operates, either independently or in partnership.
• Shares in an individual’s ‘personal company.’
• Assets utilized by a business or a company that has ceased operations within the last three years.

If an individual engages in a qualifying business disposal, relief may also extend to an ‘associated disposal,’ defined as the disposal of an asset:

• Used in a qualifying company or group of companies.
• Utilized in a partnership where the individual is a partner.

However, restrictions on obtaining relief for an ‘associated disposal’ may apply in specific circumstances. For example, if a property is personally owned but is used in an unquoted company or partnership trade for rent, the availability of relief may be limited under BADR.

Ownership Conditions

To qualify for BADR, ownership conditions must be met up to the date of disposal. For disposals occurring on or after 6 April 2019, the required qualifying ownership period is two years.

The 5% Rule for Company Shareholders

To qualify for BADR, the company must be the individual’s ‘personal company,’ meeting the following criteria:

• The individual must be an employee or office holder of the company.
• They must hold at least 5% of the company’s ordinary share capital.
• They must be able to exercise at least 5% of the voting rights.

For disposals on or after 29 October 2018, individuals must also satisfy one of these tests:

• Distribution Test: The individual is entitled to at least 5% of the company’s profits available for distribution to equity holders and 5% of the assets available for distribution during a winding up.
• Proceeds Test: The individual is entitled to at least 5% of the proceeds in the event of a complete disposal of the company’s ordinary share capital.

Dilution Considerations

As of 6 April 2019, shareholders whose holdings are diluted below the 5% qualifying level due to fundraising via the issuance of new shares may still qualify for BADR. Shareholders can elect to crystallize a gain on their shares before the dilution occurs by treating the shares as having been sold and then immediately repurchased at the current market value. This election must be included in their tax return for the year the dilution takes place. Additionally, shareholders may choose to defer the accrued gain until the actual disposal of their shares.

If you wish to discuss BADR in detail and its implications for your business, please feel free to reach out.

Investors’ Relief (IR)

IR targets external investors (excluding certain employees or officers) in unlisted trading companies. To qualify for the 10% CGT rate under ‘investors’ relief,’ individuals must meet the following conditions:

• Shares must be newly issued and subscribed for by the individual for new consideration.
• Shares must be in an unlisted trading company or an unlisted holding company of a trading group.
• Shares must have been issued on or after 17 March 2016 and held for three years from 6 April 2016.
• Shares must have been continuously held for three years before disposal.

The qualifying gains for IR are capped at a lifetime limit of £10 million.

Share Identification Rules

All shares of the same class within a single company are considered a single asset, regardless of when they were acquired. However, ‘same-day’ transactions are matched, and ‘30-day’ anti-avoidance rules apply.

Example: On 15 April 2024, Jeff sold 2,000 shares in A plc from his total holding of 4,000 shares acquired as follows:

• 1,000 shares in January 1990
• 1,500 shares in March 2001
• 1,500 shares in July 2005

Due to significant stock market changes, he purchased 500 shares on 30 April 2024 in the same company. The disposal of 2,000 shares will first match with the later purchase of 500 shares (since it’s within 30 days), and then with 1,500 of the remaining shares based on an average cost basis.

CGT Annual Exemption

Each individual is allowed to make gains up to the annual exemption limit without incurring any CGT. For the 2024/25 tax year, the annual exemption is £3,000 (£6,000 for 2023/24). It is advisable for both spouses or civil partners to utilize this exemption effectively.

Exceptions to CGT Rates

While CGT rates are generally set at 10% and 20%, different rates of 18% and 24% apply to carried interest and chargeable gains on residential property that does not qualify for private residence relief.

Complex Situations

Capital gains can arise in various complex scenarios. Some of these situations, such as gains on Enterprise Investment Scheme shares, Venture Capital Trust shares, and deferred gains from share-for-share or share-for-loan note exchanges, require careful consideration. Please consult us before making any decisions.

Additional Reliefs You May Be Entitled To

Lastly, numerous existing reliefs remain available, including:

• Private residence relief
• Business asset rollover relief, which allows the deferral of gains on a business asset until a later date
• Business asset gift relief, which enables the gain on gifted business assets to be postponed until the assets are sold by the recipient
• Unused allowable losses from previous years, which can be carried forward to offset against any gains.