Capital Gains Tax (CGT) - Reliefs

Question 1

What are the conditions for BADR relief to be available on disposals?

Answer 1

Trading business
Own at least 5% of the share capital
Must have been owned for at least 2 years prior to cessation
The asset must be sold within 3 years of business when the business ceased

Question 2

Who is BADR relief available to?

Answer 2

Individuals disposing of their own personal business or interests in a partnership

Directors and employees selling shares in the company they work for

NOT AVAILABLE TO COMPANIES

Question 3

What items are eligible under BADR?

Answer 3

A material disposal of assets

• whole or a part of a sole trade or partnership business
• an asset used in a business at the time the business ceases
• shares and securities (for example loan stock) in company

Question 4

What type of assets is BADR relief not available on?

Answer 4

Investment assets

Only available on business assets disposed within 3 years of business cessation

Question 5

For disposal of EMI shares, how is BADR relief different?

Answer 5

No need to hold more than 5% of the shareholding for BADR relief

The qualifying period (2 years prior to disposal) runs from the date the option is granted, not when the shares are acquired

Question 6

How is BADR applied?

Answer 6

Calculate the gains and losses on both qualifying and non-qualifying assets separately

Tax the gains as qualifying net chargeable gains @ 10%

Any non-qualifying net chargeable gains as normal at either 10% or 20% (remember that qualifying gains uses the BRB first)

Question 7

What is investors relief?

Answer 7

Extends the benefits of BADR to those who aren’t eligible for BADR

Applies to disposal of:

• unlisted ordinary shares in a trading company (including AIM shares)
• newly issued shares on (after March 16)
• Which have been held for a minimum period of 3 years
• By an individual that is not an employee of the company

Question 8

What is the lifetime limit for investors relief?

Answer 8

£10 million of qualifying gains

Question 9

What is the lifetime limit for BADR?

Answer 9

£1 million

Any gains higher than £1 million will be taxed in full at 10% / 20%

Question 10

What date must BADR be claimed by?

Answer 10

31st Jan (2 years after end tax year)

i.e. for 2020/21 disposals, the relief must be claimed by 31st Jan 2023

Question 11

What are the conditions for Private Residence Relief (PRR)?

Answer 11

Deemed occupation

Conditional

• up to 3 years (any reason)
• any period (employed abroad)
• up to 4 years working elsewhere in the UK or working abroad if self employed

Unconditional
- Last 9 months of ownership

Question 12

What is the PRR formula?

Answer 12

Gain x (periods of occupation/ period of ownership)

Question 13

What is letting relief (PRR)?

Answer 13

If the property is partly let while owner occupied

Letting relief = lower of:

1. £40,000
2. PRR relief
3. Gain re letting

Question 14

What is Rollover Relief?

Answer 14

Relief for the replacement of qualifying business assets

ROR is the only relief available to companies.

Question 15

What are the conditions for ROR?

Answer 15

Qualifying business assets

• Land & buildings
• Fixed plant & machinery
• Goodwill (unincorporated only)

Qualifying period

• from 1 year before
• to 3 years after the date of disposal

Claim is made
- within 4 years of later of sale or replacement

For a 2020/21 disposal and replacement
- by 5 April 2025

Question 16

What is the effect of rollover relief?

Answer 16

• No tax is payable when old asset is sold

- Gain is deferred until the new asset is sold

Question 17

Partial reinvestment for rollover relief?

Answer 17

When all proceeds are not reinvested the gain that can be rolled over is restricted

A chargeable gain arises = lower of:

• the proceeds not reinvested
• the chargeable gain

Taxable on the disposal of the original asset
The remaining gain is deferred

Question 18

Is BADR available on the disposal of an individual asset?

Answer 18

No, BADR is only available if the entire business is being sold

There is no BADR on the disposal of an individual asset

Question 19

If an entire business is sold and all the proceeds are reinvested into new qualifying assets, what relief should be used?

Answer 19

Rollover relief

• The gains may be deferred
• BADR only considered on subsequent disposal of replacement asset
• BADR also considered if only partial reinvestment

Question 20

What is a depreciating asset?

Answer 20

Life of less than 60 years

Common examples:

• Plant & machinery
• Leasehold property of less than 60 years

Question 21

How can relief be claimed on a depreciating asset?

Answer 21

Gain is ‘frozen’ (i.e. deferred) and crystallizes on the earliest of:

• sale of depreciating asset
• date depreciating asset ceases to be used in trade
• 10 years from acquisition of the depreciating asset

When deferred gain crystallizes:
- taxed at appropriate rate of CGT at that time (not at the time of deferral)

Question 22

What are qualifying assets for gift relief?

Answer 22

Assets which are used for business

1. shares which the donor owns more than 5% voting rights
2. shares in an unquoted company
3. shares in donor’s personal trading company
4. any asset where there is an immediate charge to IHT (e.g. gift to trust)
5. Agricultural property eligible for APR.

Question 23

What is the effect of gift relief?

Answer 23

Deemed consideration = market value gain deferred against base cost to donee

Question 24

What is incorporation relief?

Answer 24

Where an individual incorporates his or her sole trader or partnership business:
- chargeable gains arise on the market value of the individual assets transferred

Incorporation relief is a relief which:

• Applies automatically
• To defer the net chargeable gains arising on incorporation
• Provided certain conditions are met

Question 25

What is the incorporation relief if the consideration is wholly shares?

Answer 25

• No gain on incorporation

- Gains deferred until the subsequent disposal of the shares

Question 26

What is the incorporation relief if non-share consideration is recieved?

Answer 26

• a chargeable gain arises on incorporation

- taxed at 0%, 10% or 20%, depending on the availability of AEA, BADR and level of taxable income