Capital gains tax

We consider the taxation of capital gains and outline the reliefs available. If you live in the Devon area we, at Northams, can provide taxation advice to ensure that maximum opportunity is taken of the reliefs available for capital gains tax.

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 of the current system?

Entrepreneurs' Relief (ER)

ER may be available for certain business disposals and has the effect of charging the first £10 million of gains qualifying for the relief at an effective rate of 10%.

The relief will be available to individuals on the disposal of:

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:

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 ER the availability of relief is restricted where rent is paid.

Ownership period of two years

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 ER, the company needs to be an individual’s ‘personal company’ where the individual must:

For disposals on or after 29 October 2018, they must also satisfy one of the following tests:

Dilution

From 6 April 2019 those shareholders whose holding in their company is reduced below the normal 5% qualifying level as a result of raising funds for commercial purposes by means of an issue of new shares may still obtain ER. An election can be made which allows shareholders to crystallise a gain on their shares before the dilution occurs. This would be achieved by treating the shareholding as having been sold and immediately re-purchased at the prevailing market value. The election will have to be made in their tax return for the year in which the dilution takes place. The shareholder may also elect to defer the accrued gain until their shares are actually disposed of.

Careful planning will be required with ER but if you would like to discuss ER in detail and how it might affect your business, please do get in touch.

Investors' Relief (IR)

ER has been extended to 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:

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 the '30 day' anti-avoidance rules will remain.

Example

On 15 April 2019 Jeff sold 2000 shares in A plc from his holding of 4000 shares which he had acquired as follows:

  • 1000 in January 1990
  • 1500 in March 2001
  • 1500 in July 2005

Due to significant stock market changes, he decided to purchase 500 shares on 30 April 2019 in the same company.

The disposal of 2000 shares will be matched firstly with the later transaction of 500 shares as it is within the following 30 days and then with 1,500/ 4000 (1000+1500+1500) of the single asset pool on an average cost basis.

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 2019/20 is £12,000 (£11,700 in 2018/19). 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 more complex areas

Capital gains can arise in many other situations. Some of these, such as gains on Enterprise Investment Scheme and Venture Capital Trust shares, and deferred gains on share for share or share for loan note exchanges, can be complex. Please talk to us before making any decisions.

Other reliefs which you may be entitled to

And finally, many existing reliefs continue to be available, such as:

How we can help

Careful planning of capital asset disposals is essential in order to minimise capital gains tax. If you live in the Devon area we, at Northams, would be happy to discuss the options with you. Please contact us if you would like further advice.