Capital Gains Tax

Where a taxpayer owns a business as a sole trader or in partnership, a capital gain will be deemed to arise if the business is converted into a company by reference to the market value of the business assets, including goodwill. This could give rise to a chargeable gain based broadly on the difference between the market value of the assets and their original cost. However, in most cases the incorporation of the business will be organised in such a way as to satisfy the conditions necessary to secure incorporation relief. One such condition is that the entire business with the whole of its assets (or the whole of its assets other than cash) must be transferred as a going concern wholly or partly in exchange for shares in the new company.

It is important to note that where the necessary conditions are met, incorporation relief is given automatically and there is no need to make a claim. The relief works by reducing the base cost of the new assets by a proportion of the gain arising from the disposal of the old assets.

Although the relief is automatic, it is possible to make an election in writing for incorporation relief not to apply. An election must be made before the second anniversary of 31 January next following the tax year in which the transfer took place. This means an election in respect of a transfer made in the current 2022-23 tax year must be made by 31 January 2026. The election deadline is reduced by one year if the shares are disposed of in the year following that in which the business was incorporated.

Business Asset Rollover Relief, usually referred to as ‘rollover relief’, is a valuable relief that allows for deferral of Capital Gains Tax (CGT) on gains made when taxpayers sell or dispose of certain assets and use all or part of the proceeds to buy new business assets. The relief means that the tax on the gain of the old asset is postponed. The amount of the gain is effectively rolled over into the cost of the new asset and any CGT liability is deferred until the new asset is sold.

Where only part of the proceeds from the sale of the old asset is used to buy a new asset a partial rollover claim can be made. It is also possible to claim for provisional rollover relief where the taxpayer expects to buy new assets at a future date. Interestingly, rollover relief can be claimed if taxpayers use the proceeds from the sale of the old asset to improve assets they already own. The total amount of rollover relief is dependent on the total amount reinvested to purchase new assets.

There are qualifying conditions to be met to ensure entitlement to any relief. This includes ensuring that new assets are purchased within three years of selling or disposing of the old asset(s) or up to one year before. Under certain circumstances, HMRC has the discretion to extend these time limits. In addition, both the old and new assets must be used by a business and the business must be trading when the old asset is sold and the new asset is acquired. Taxpayers must claim relief within four years of the end of the tax year when they bought the new asset or sold the old one, if that happened after.

The definition of a connected person for tax purposes can be complex and varies depending on the circumstances at hand. A statutory definition of “connected persons” for Capital Gains Tax purposes is set out in Section 286 of the Taxation of Chargeable Gains Act (TCGA) 1992. The legislation states:

" A person is connected with an individual if that person is the individual’s spouse or civil partner, or is a relative, or the spouse or civil partner of a relative of the individual or of the individual’s spouse or civil partner"

In this context, ‘relative’ means brother, sister, ancestor or linear descendant and spouses or civil partners of relatives. The term 'relative' does not cover all family relationships. In particular it does not include nephews, nieces, uncles and aunts.

HMRC’s internal manual also states that: excluded are the widows or widowers or surviving civil partners of deceased persons, or relatives of a deceased spouse or of a deceased civil partner unless connection can be established by a route not involving the deceased. A dissolution of a civil partnership or a divorce can similarly lead to persons in addition to the former civil partner or spouse ceasing to be connected with the individual.

One of the most often used and valuable of the Capital Gains Tax (CGT) exemptions arises on the sale of the family home. In general, there is no CGT to pay on a property that has been used as the main family residence. An investment property which has never been used will not qualify. This relief from CGT is commonly known as private residence relief or PRR.

The rules are different if you live abroad. A CGT charge on the sale of UK residential property by non-UK residents was introduced in April 2015. Only the amount of the overall gain relating to the period after 5 April 2015 is chargeable to tax. In certain circumstances PRR may apply where the property is the owner’s only or main residence.

A UK non-resident that sells UK residential property needs to deliver a non-resident CGT (NRCGT) return and pay any CGT within 60 days of selling a relevant property. The return must be made whether or not there is any NRCGT to be paid and even if there is a loss on the disposal, or where the taxpayer is due to report the disposal on their Self-Assessment tax return.

There are penalties for failing to file the NRCGT return within the deadline as well as for failing to pay any tax due on time.

If you are part of a couple that is about to separate or divorce, apart from the emotional stress, there are also tax issues that can have significant implications. Whilst this is unlikely to be uppermost in your mind it is important that the tax consequences of the break-up are considered.

Income Tax does not automatically cause an issue for separating couples as it is an individually assessed tax, however, there are other taxes that need to be considered. For example, when a couple are together there is no Capital Gains Tax (CGT) payable on assets gifted or sold to your spouse or civil partner. But if a couple separate and do not live together for an entire tax year or are divorced then CGT may be payable on assets transferred between ex-partners.

It is also important to reach a financial agreement acceptable to both parties. If no agreement can be reached, then applying to the courts to make a 'financial order' will usually be required. The couple and their advisers should also give proper thought to what will happen to the family home, any family businesses as well as any inheritance tax implications.

Business Asset Disposal Relief (BADR) applies to the sale of a business, shares in a trading company or an individual’s interest in a trading partnership. Where this relief is available CGT of 10% is payable in place of the standard rate. There are a number of qualifying conditions that must be met in order to qualify for the relief.

BADR used to be known as Entrepreneurs’ Relief before 6 April 2020. The name change did not affect the operation of the relief.

You can currently claim a total of £1 million in BADR over your lifetime. The £1m lifetime limit means you can qualify for the relief more than once. The lifetime limit may be higher if you sold assets before 11 March 2020.

Claims for BADR are made through your Self-Assessment tax return or by filling in Section A of the Business Asset Disposal Relief help sheet.

The deadline for claiming relief is as follows:

Capital Gains Tax (CGT) is a tax on the profit made from selling certain assets such as property, shares or other investments. CGT is usually charged at a flat rate of 20% and applies to most chargeable gains made by individuals.

If taxpayers only pay basic rate tax and make a small capital gain, they may only be subject to CGT at a reduced rate of 10%. Once the total of taxable income and gains exceed the higher rate threshold, the excess will be subject to 20% CGT. An 8% surcharge applies to the sale of chargeable residential property (apart from a principal private residence) and carried interest (the share of profits or gains that is paid to asset managers). There is also an annual CGT exemption for individuals that is currently £12,300.

There are a number of asset disposals, which are not subject to CGT.

These include:

• your car
• your main residence – known as a principal private residence, but there are some important caveats to be aware of
• personal possessions worth up to £6,000 each, such as jewellery, paintings or antiques
• stocks and shares you hold in tax-free investment savings accounts, such as ISAs and PEPs
• UK Government or 'gilt-edged' securities, for example, National Savings Certificates, Premium Bonds and loan stock issued by the Treasury
• betting, lottery or pools winnings
• personal injury compensation
• foreign currency you bought for your own or your family's personal use outside the UK

So, if you are lucky enough to win the National Lottery this weekend, it is unlikely you will have to pay CGT!

Note that none of the above exemptions apply when the gains arise through trading or business activities as distinct from occasional sales and disposals.

One of the most often used and valuable of the Capital Gains Tax (CGT) exemptions covers the sale of the family home. In general, there is no CGT to pay on a property which has been used as the main family residence. An investment property which has never been used will not qualify. This relief from CGT is commonly known as private residence relief or PRR.

The rules are different if you live abroad. A CGT charge on the sale of UK residential property by non-UK residents was introduced in April 2015. Only the amount of the overall gain relating to the period after 5 April 2015 is chargeable to tax. In certain circumstances PRR may apply where the property is the owner’s only or main residence.

A UK non-resident that sells UK residential property needs to deliver a non-resident CGT (NRCGT) return and pay any CGT within 60 days of selling a relevant property. The return must be made whether or not there is any NRCGT to be paid, if there is a loss on the disposal, and when the taxpayer is due to report the disposal on their Self-Assessment tax return.

There are penalties for failing to file the NRCGT return within the deadline as well as for failing to pay any tax due on time.