DISPOSALS AND CAPITAL GAINS TAX Making the most of your investments requires some understanding that capital gains tax (CGT) arises on the sale of most assets and, subject to various reliefs and exemptions, is payable on the difference between the sale proceeds and the original cost. Where property has been improved then these capital costs may be available to reduce the value of the gain.
Business Asset Disposal Relief Business Asset Disposal Relief (BADR) which was formerly known as Entrepreneurs’ Relief may be available on the first £1 million gains from the disposal of certain businesses during an individual’s lifetime. Qualifying gains are taxed at a 10% rate of tax. Qualifying business disposals include: • qualifying shareholdings (see the 5% rules below for more details) • the whole or part of an unincorporated business • the disposal of assets on cessation of a business. For disposals on or after 6 April 2019, there needs to be a qualifying period of ownership of two years up to the date of disposal. 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 which is: used in a qualifying company of the individual; or used in a partnership, where the individual is a partner. The 5% rules 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. An individual must also satisfy either: • the distribution tests which require them to be entitled to at least 5% of the company’s profits available for distribution and 5% of the assets available for distribution in a winding up; or • a proceeds test which requires them, in the event of disposal of the whole of the share capital of the company, to be beneficially entitled to at least 5% of the proceeds. Investors’ Relief A 10% CGT rate applies to external investors (ie not employees or officers of the company) in unlisted trading companies. Conditions apply: • 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 the disposal. An individual’s gains for investors’ relief will be subject to a lifetime cap of £10 million.
The CGT annual exemption results in the first £12,300 of gains, for 2021/22, being tax free. In general CGT is payable at 10% where total taxable gains and income, after taking into account all allowable deductions are less than the income tax basic rate band. CGT is payable at 20% on gains, or any parts of gains, above this limit. However, higher rates (18% and 28%) apply for chargeable gains on residential property that do not qualify for private residence relief. New reporting and payment requirement From 6 April 2020 those liable to CGT on a residential property disposal must send a standalone online return to HMRC and make a payment on account of the tax due within 30 days of completion of the sale. Transactions completed from 1 July 2020 onwards will receive a late filing penalty if they are not reported within 30 calendar days. Interest will accrue if the tax remains unpaid after 30 days.
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Disposals and Capital Gains Tax
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