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?

• Cap­i­tal gains tax (CGT) is charged at the rate of 18% on gains (includ­ing any held over gains com­ing into charge) where net total tax­able gains and income is below the income tax basic rate band thresh­old. This rate was 10% for dis­pos­als made before 30 Octo­ber 2024. Gains or any parts of gains above the basic rate band are charged at 24% (20% for dis­pos­als before 30 Octo­ber 2024) with a few excep­tions which are con­sid­ered in the ‘Excep­tions to the CGT rates sec­tion’ below.
• Busi­ness asset dis­pos­al relief (for­mer­ly known as Entre­pre­neurs’ Relief) or Investors’ Relief (IR) may be avail­able on cer­tain busi­ness dis­pos­als.

Business asset disposal relief (BADR)

BADR may be avail­able for cer­tain busi­ness dis­pos­als and has the effect of charg­ing the first £1 mil­lion of gains qual­i­fy­ing for the relief at an effec­tive rate of 18% for 2026/27 (14% for 2025/26).

The relief is avail­able to indi­vid­u­als on the dis­pos­al of:

• the whole, or part, of a trad­ing busi­ness that is car­ried on by the indi­vid­ual, either alone or in part­ner­ship
• shares in an individual’s ‘per­son­al com­pa­ny’
• assets used by a busi­ness or a com­pa­ny which has ceased with­in the last three years.

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:

• used in a qual­i­fy­ing com­pa­ny or group of com­pa­nies of the indi­vid­ual; or
• used in a part­ner­ship, where the indi­vid­ual is a part­ner.

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 BADR 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 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.

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

• a dis­tri­b­u­tion test – an indi­vid­ual is enti­tled to at least 5% of the com­pa­ny’s prof­it avail­able for dis­tri­b­u­tion to equi­ty hold­ers and 5% of the assets avail­able for dis­tri­b­u­tion to equi­ty hold­ers in a wind­ing up; or
• a pro­ceeds test – an indi­vid­ual is enti­tled to at least 5% of the pro­ceeds in the event of a dis­pos­al of the whole of the ordi­nary share cap­i­tal of the com­pa­ny.

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 BADR. 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 BADR but if you would like to dis­cuss BADR in detail and how it might affect your busi­ness, please do get in touch.

Investors’ Relief (IR)

IR is aimed at exter­nal investors (oth­er than cer­tain employ­ees or offi­cers of the com­pa­ny) in unlist­ed trad­ing com­pa­nies. Dis­pos­als qual­i­fy­ing for IR are sub­ject to a CGT rate of 18% for 2026/27 (14% in 2025/26). To qual­i­fy for IR, the fol­low­ing con­di­tions need to be met:

• 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 dis­pos­al.

An indi­vid­u­al’s qual­i­fy­ing gains for IR are sub­ject to a life­time cap of £1 mil­lion (reduced from £10 mil­lion for qual­i­fy­ing dis­pos­als made on or after 30 Octo­ber 2024).

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 there are ‘30 day’ anti-avoid­ance rules.

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 2026/27 is £3,000 (£3,000 for 2025/26). Con­sid­er­a­tion should be giv­en to ensur­ing both spouses/civil part­ners utilise this facil­i­ty.

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:

• pri­vate res­i­dence relief;
• busi­ness asset rollover relief, which enables the gain on a busi­ness asset to be deferred until a point in the future;
• busi­ness asset gift relief, which allows the gain on busi­ness assets that are giv­en away to be held over until the assets are dis­posed of by the donee; and
• any unused allow­able loss­es from pre­vi­ous years, which can be brought for­ward in order to reduce any gains.