Capital Gains Tax

Entrepreneurs' relief 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 Capital Gains Tax (CGT) of 10% is payable in place of the standard rate. CGT on the disposal of chargeable assets is usually chargeable at 20%. There are a number of qualifying conditions that must be met in order to qualify for Entrepreneurs' relief.

There is a lifetime limit that means individuals can qualify for the relief more than once, subject to an overriding total limit of £10m of qualifying capital gains. The relief is available to individuals as well as some trustees of settlements. To qualify the individual should be either an officer or employee of the company and own at least 5% of the company and have at least 5% of the voting rights. There are also some other qualifying conditions that must be met in order to qualify for the relief.

Planning note

The minimum period during which certain conditions must be met in order to qualify for Entrepreneurs' relief increased from one to two years from 6 April 2019. There are special provisions if the business ceased operating before 29 October 2018. This measure means that taxpayers looking to claim ER will be required to have a longer-term interest in their business. There had been suggestions that the relief could have been abolished in its entirety so for most entrepreneurs this is a manageable change.

A charge to Capital Gains Tax (CGT) usually arises after an asset is sold. However, there are special rules concerning the sale of certain personal assets that are worth considering.  That is because these assets or possessions with a predictable useful life of 50 years or less are normally exempt from CGT. A chattel is a legal term that defines an article of movable personal property. Chattels include items like household furniture, paintings, antiques, items of crockery and china, plate and silverware, motor cars, lorries, motorcycles and items of plant and machinery not permanently fixed to a building.

The gains on any chattels you sell are exempt if the proceeds do not exceed £6,000 per item. In addition, marginal relief may be available where the proceeds are between £6,000 and £15,000. The taxable gain is calculated as the lower of the actual gain or 5/3rds of the excess over £6,000. The disposal proceeds will normally be the amount of money you received when you disposed of the chattel.

There are also special rules for sets of chattels. A set is two or more chattels together which are similar and complementary to each other, and worth more together than separately. Examples include matching ornaments or a set of chess pieces. Where a set is sold, the £6,000 limit applies to the set and there are special rules to sets that have been broken up and sold separately.

Please call if you are concerned about the CGT consequences of an impending disposal.

Two changes to the way Private Residence Relief works are due to come into effect from April 2020. These changes could reduce the amount of CGT relief available on the sale of a private residence. The government has said that the measures are being introduced to better focus Private Residence Relief at owner-occupiers and the changes will mostly affect home owners who let out their home, or part of their home at some time.

The current private residence rules and forthcoming changes

Currently, if a property has been occupied at any time as an individual’s private residence, the last 18 months of ownership are disregarded for CGT purposes. This relief applies even if the individual was not living in the property when it was sold. From April 2020, this final exempt period will be reduced from 18 months to 9 months.

The intention of this relief was to protect those who had difficulty selling their original home after purchasing a new home. However, the long exemption period allows all qualifying home owners to accrue CGT reliefs on two properties at the same time. The government is concerned that this relief is being used by some homeowners / landlords who intentionally hold on to a property they have lived in to benefit from the CGT reliefs available.

There will be no change to the 36 months exempt period available for those that are disabled or moving into care homes.

Home owners that presently let all or part of their house may not benefit from the full private residence relief but can benefit from letting relief of up to £40,000 (£80,000 for a couple). The relief is not available on a 'buy to let' property in which the owner has never lived.

From April 2020, lettings relief will be reformed. The change will mean that lettings relief will only be available to those property owners who are in shared occupancy with a tenant.

Are you considering a property sale?

If you have two properties on which you can take advantage of Private Residence Relief then it might be time to consider your options and look to possibly sell one of these properties before April 2020.

Also, it is important to note that these changes from April 2020 do not affect landlords who have never lived in a rented property.

Sometimes tax-payers may sell an asset at a loss. If acceptable as capital losses, they can be deducted from Capital Gains made in the same or future years.  As a general rule, if the asset would have been liable to CGT had a gain taken place then the loss should be an allowable deduction. 

These allowable losses are deducted automatically. It is not necessary to make a claim for set-off of losses. However, it is possible to claim that losses are allowable and the preference to be given to such losses.

Unused losses that cannot be set against gains of the same year are carried forward to be set against future gains. It is only possible to utilise losses brought forward if net gains exceed the annual CGT exempt amount for the year.

If the net gains are greater than the annual exempt amount, the amount of losses brought forward to be utilised is the smaller of:

• the total losses brought forward,


• the total necessary to reduce the net gains to the level of the annual exempt amount. Any excess loss is carried forward.

If you own shares or other assets that become worthless you can make a ‘negligible value claim’.  This procedure allows you to establish a capital loss even though you are still the legal owner of the ‘asset’. Such losses can be deducted from other capital gains as noted above.

There are a number of issues that owners of more than one home should be aware of. An individual, married couple or those in a civil partnership can only benefit from CGT on one property at a time. However, it is possible to choose, by election, which property is treated as a main residence and therefore benefits from a CGT exemption when sold.

When a home owner lives in more than one property, they must inform HMRC which property is their main residence. There are special rules which determine the timing and frequency of making such an election. The home owner must make a ‘nomination’ within two years of changing the number of properties that they occupy. A new nomination should be made whenever the number of homes a taxpayer lives in changes.

For example, a taxpayer lives in Manchester and purchases a second home in London in February 2019. The home owner can nominate either property as his main home provided this is done within two years i.e. by February 2021. Where the taxpayer does not make a nomination within 2 years, HMRC will decide which is the main home based on the facts. This may significantly affect the amount of CGT to be paid.

Home owners that are married or in a civil partnership and own two or more homes between them must make a joint nomination and are only entitled to Private Residence Relief on one home.

Capital Gains Tax (CGT) is normally charged at a simple flat rate of 20% and this applies to most chargeable gains made by individuals. However, if you only pay basic rate tax and make a small capital gain, you may only be subject to a reduced rate of 10%.

Once the total of your taxable income and gains exceed the higher rate threshold, the excess will be subject to 20% CGT. A higher rate of CGT applies (18% and 28%) to gains on the disposal of residential property (apart from a qualifying principal private residence). There is an annual CGT exemption for individuals of £11,700 for the current tax year and this will increase to £12,000 from 6 April 2019.

The usual due date for paying any CGT you owe to HMRC is the 31 January, following the end of the tax year in which a capital gain was made. This means that CGT for any gains crystalised before 6 April 2019 will be due for payment on or before 31 January 2020. However, if you waited until the start of the next tax year, you would have until 31 January 2021 to pay any CGT due. At the extreme end of the scale, you could benefit from an extra whole year to pay any CGT due just by waiting to crystallise a gain from the 5 April 2019 (2018-19 tax year) until the 6 April 2019 (2019-20 tax year). 

The usual way to report a gain is to complete the relevant sections of your Self Assessment tax return.

Reduction in payment period to 30 days

There are existing special payment and reporting requirements if you live abroad and sell a UK residential property and you must inform HMRC within 30 days of the sale. The notification must be made whether or not there is any non-resident CGT to be paid. Any non-resident CGT that is due must also be paid within 30 days of the conveyance date. There are penalties for late payment and we would strongly advise that you monitor any CGT due and ensure the relevant payment deadlines are met.

These changes will also apply to UK-residents from April 2020 if there is CGT to be paid on a residential property sale.

As a general rule, there is no Capital Gains Tax (CGT) on a property which has been used wholly as a main family residence. This relief from CGT is commonly known as Private Residence Relief. Conversely, an investment property that has never been used as a main residence will not qualify.

It is not uncommon for taxpayers to own more than one home, and there are a number of issues that home owners should be aware of. For example, an individual, married couple or civil partnership can only benefit from CGT relief on one property at a time. It is possible to choose which property benefits from a CGT exemption, but there are special rules which determine the timing and frequency of changing an election which will need to be considered.

Planning opportunity

However, there is an Extra Statutory Concession (ESC – D49) that under certain circumstances will allow for CGT relief for two dwellings over the same period.

The ESC applies under the following circumstances where there is a delay in taking up residence in a new home:

• where the delay in taking up residence is because a dwelling house is being built on that land,
• where the delay in taking up residence is because of the continuing occupation of the previous residence while arrangements are made to sell it, 
• where the delay in taking up residence is because alterations or redecorations are being carried out.

This ESC allows for relief for up to 12 months and can be extended to 24 months under exceptional circumstances.

Capital Gains Tax (CGT) rollover relief is a valuable relief that allows for a delay in the payment of CGT on gains when you sell or dispose of certain assets and use all or part of the proceeds to buy new 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.

One issue that needs to be considered when looking at claims to rollover relief is, who is the beneficial owner of the asset in question? HMRC has identified the following scenarios where problems can arise:

• where the trade is carried on by a partnership consisting of either a husband and wife or of civil partners of each other and there is no partnership agreement and a common capital account;
• where an asset has been acquired for use by a partnership but there is doubt about the extent of each partner’s interest in it.

Case law has established that husbands and wives are separate persons for rollover relief purposes. Similarly, civil partners of each other are also separate persons for roll-over relief purposes. This means it will be necessary to identify the interests held by each in the material asset and then to apply the roll-over relief conditions to that interest in that asset. In the case of partnerships, it is important to calculate the extent of each partner’s interest in a partnership asset.

Taxpayers should also consider if it will be more beneficial to claim entrepreneurs’ relief (if eligible) and pay the CGT due at the lower 10% rate at the time of the disposal of the old asset.

Investment clubs are loosely defined as a group of people who get together to buy and sell shares on the stock market with a view to making a profit. An investment club does not have any special legal status and usually operates as a kind of informal partnership. These clubs can offer an interesting perspective to investors helping to hone their skills, share risk and benefit from new fonts of knowledge.

HMRC publishes special guidance as to how gains and losses should be handled as part of an investment club. The person who runs the club must prepare an annual statement of the club’s gains and losses. This is known as an ‘Investment club certificate’. This document lists each person’s share of any capital gains or losses.

The investment club treasurer or secretary should also:

• divide any income, gains and losses between its members according to the club’s rules
• keep records including members’ income and gains
• arrange to buy shares from members who want to leave the club

If you are starting a new investment club, you should make sure it has a constitution and rules.

The annual Capital Gains Tax (CGT) exemption for individuals is £11,700 for 2018-19. A husband and wife each benefit from a separate exemption. Same-sex couples who acquire a legal status as civil partners are treated in the same way as married couples for CGT purposes.

CGT is normally charged at a simple flat rate of 20% and this 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 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. A higher rate of CGT applies (18% and 28%) to gains on the disposal of residential property (apart from a principal private residence).

The usual due date for paying CGT to HMRC is the 31 January following the end of the tax year in which a capital gain was made. This means that CGT will be payable for any gains made during 2018-19 on or before 31 January 2020. The usual way to report a gain is to complete the relevant sections of the Self Assessment tax return.

HMRC also offers a ‘real time’ Capital Gains Tax service that allows taxpayers to report any gains and pay straight away. Using this service would obviously mean paying any CGT due before the official deadline so we would assume that the use of this service would only be appealing under limited circumstances. Taxpayers using this service must wait for HMRC to issue a payment reference number before making payment.

There are also special payment and reporting requirements if you live abroad and sell a UK residential property, and you must inform HMRC within 30 days of the sale. The notification must be made whether or not there is any non-resident CGT to be paid. Any non-resident CGT that is due must also be paid within 30 days of the conveyance date. There are penalties for late payment, and we would strongly advise that you monitor any CGT due and ensure the relevant payment deadlines are met.