Chapter 11 Capital gains tax – reliefs Flashcards
1.1 Rollover relief
Deduct the gain arising on the disposal of the old asset from the acquisition cost of the new asset. If proceeds are fully reinvested, the gain can be deferred, and no tax is payable. If partial reinvestment part of the gain is chargeable, this is the lower of the amount of the proceeds not reinvested and the full gain. The relief is not automatic but must be claimed.
2.1 BADR
An individual will net off gains and losses on the sale of a business, deduct any current year losses, AEA and bf capital losses, then tax the gain at 10%. The rate applies to the first qualifying net gains up to the lifetime limit of £1 million for gains on disposals made on or after 11 March 2010 (£10m was previous allowance). BADR gains also use up any remaining basic rate band. The relief is not automatic and must be claimed, time limit for a claim is 12 months from 31 January following the tax year in which the qualifying disposal is made.
2.2 Qualifying BADR disposals
BADR is available on gains for qualifying business disposals. All or part of an unincorporated trading business, or assets of the business within three years of cessation and shares in a personal trading company will qualify. BADR is also available on shares issued under an EMI option scheme. There is no minimum holding required for shares issued in this way, and the two years required ownership period is met if the period between grant and disposal is at least this long.
Unless shares are issued through an EMI share option scheme, BADR is only available if shares are in an individuals personal trading company. This means the taxpayer is an officer or employee of the company, and owns at least 5% of the share capital and is entitled to 5% of assets on winding up. If the shareholding has fallen below 5% due to a new issue of shares for cash, BADR is still available if prior to this, BADR would have been available. If the company is not trading BADR is not available.
The qualifying time period means assets must be owned for at least two years. For shares the individual must have been working in the company for the most recent two years (for EMI shares the relevant holding period runs from date of grant and not exercise). When an individual is disposing shares received on incorporation, the combined ownership of business assets and the shares can be used to determine the two year period.
BADR cannot be claimed on goodwill transferred to a close company where immediately after the disposal the individual owns at least 5% of the shares in the company. This means that goodwill transferred on incorporation does not normally qualify. The restriction does not apply if within 28 days of the incorporation those shares are sold to an unconnected party.
2.3 Associated disposals
Where an individual disposes of both shares (more than 5% holding) or an interest in a partnership and an asset owned personally but used by the company or partnership. Then if BADR is available on shares/interest in partnership it will also be available on the asset.
HMRC treat a disposal as associated if it accompanies a sale of shares where the disposal is less than 5% but is a disposal of the individual’s entire holding, and the individual previously held at least 5%. The asset must have been owned by the individual for at least three years at the date of disposal and used in the business for at least two years.
The asset will not be eligible for BADR if it is let to the company/partnership at full market rent. Partial relief applies if it is let at a reduced rent and full relief applies if let rent-free.
3.1 Gift relief
Allows the gain to be held over until the asset is sold by the donee. This is available for business assets gifted by individuals and any lifetime transfer where there is an immediate charge to IHT. For the donor the gain is not chargeable but is deducted from the acquisition cost for the donee. The donee is deemed to have acquired the asset at its market value on transfer.
A joint claim must be made within four years following the end of the tax year in which the git was made.
Other qualifying assets are:
- Assets used in the trade of the donor or donor’s personal trading company (gain here is restricted if that company owns any assets not for the purpose of trade: gain eligble is total gain x (MV chargeable business assets/ MV all chargeable assets)
- Trading company shares where the company is unquoted or donor’s personal company (where donor has more than 5% voting rights)
- Any asset with an immediate charge to IHT
3.2 Gift relief – sales at undervalue.
Gift relief also applies to sales at undervalue. The relief is modified as any proceeds received that exceed the original cost of the asset are chargeable to CGT at the date of the gift and the gift relief available is reduced by the amount chargeable
3.3 Gift relief and BADR interaction
Where both available and gift relief is claimed, then this is applied first. Gift relief cannot also be restricted to utilise AEA and capital losses. If the gain left in charge to tax after gift relief is covered by the AEA or basic rate band, BADR should not be claimed.
4.1 Investors relief
If an individual disposes of qualifying shares, the gains on the shares will qualify for CGT at 10%. The lifetime limit is £10 million. The conditions are:
- Shares must have been subscribed for as new shares by the individual making the disposal.
- Must be in an unlisted trading company.
- Must have been issued by the company on, or after, 17 March 2016 and must have been held for a period of at least three years from 6 April 2016
- They must have been held for three years continuously before disposal.
- There is no minimum shareholding for investors’ relief and the taxpayer must not be an employee or officer of the company.
- Time limit for claim is 12 months from 31 January following the tax year in which the qualifying disposal is made.
5.1 Takeovers and reconstructions
This is when someone owning a company, uses those shares in exchange for shares in another company, thus owning both of them, this is a share for share exchange. The taxpayer ‘sells’ shares and therefore a gain arises. As there are no cash proceeds the gain can be deferred.
The new shares stand in the shoes of the old shares and take on the original cost and acquisition date. The relief is automatic as long as the new shares are issued in proportion to the old shares, and after the takeover the acquiring company controls more than 25% of the ordinary share cap and is not part of a scheme to avoid tax.
It is possible to elect to disapply share for share exchange relief. This may be beneficial if the old shares qualify for BADR.
If mixed consideration is received, the original cost of the old shares needs to be apportioned between the different forms of consideration.
- New shares: take on apportioned original cost and acquisition date of the old shares. No gain arises until new shares are sold.
- Cash: If cash is less than 5% of the consideration or less than £3,000 then no gain is charged, and the cash is deducted from the base cost of the shares. Otherwise, a gain will arise based on the apportioned part of the cost.
- Qualifying corporate bonds: a gain will arise based on the apportioned part of the cost. The gain is deferred until the QCBs are disposed of. For individuals the disposal of loan stock is exempt from CGT
- Non-qualifying bonds: treated the same way as shares.
5.2 Takeovers involving QCBs and interaction with BADR.
If QCBs are received under a takeover the normal rule is to calculate the gain in respect of the disposal of the shares and defer the gain until the QCBs are disposed of. If the disposal qualifies for BADR, then this is available on the takeover if an election is made not to defer the gain on the QCBs. The gain is then chargeable at the time of the takeover and business asset disposal relief can be claimed. If the election is made, BADR is not available but the gain attributable to the QCBs can be deferred.
6.1 Private residence relief
The periods of deemed occupation include:
- Last nine months of ownership
- Three years any reason
- Working abroad
- Four years working in the UK
The bottom three periods ust be preceded and followed by actual occupation
Letting relief applies when the owner lets part of the property whilst still occupying the remainder and is the lower of: PRR given, £40,000 and the gain relating to the period of ownership qualifying for letting relief (after PRR)
