With the Budget soon upon us at the beginning of March, it is a timely reminder to consider one of the most important capital gains tax reliefs available, particularly to those who are in business.
Capital Gains Tax (CGT)
By way of a reminder, the annual exemption for the current tax year is £12,300 for individuals. Please be aware that married couples and civil partners have a £12,300 exemption each. If your taxable income is less than £37,500 the capital gains tax rate for gains up to the remaining basic rate band allowance is 10%. Gains above that are at 20%.
You will be aware that in recent times the Government have made the capital gains tax regime in relation to residential properties more draconian than ever. At present, gains from the sale of a residential property which is not your principal private residence (your second home) are taxed at rates of 18% if you are a basic rate taxpayer or 28% if you are a taxpayer paying tax at the higher or additional rate.
You hopefully are aware that the gains made on UK residential property must be reported and paid within 30 days of the sale being completed.
Business Asset Disposal Relief (BADR)
BADR reduces the rate of capital gains tax due on disposal of all or part of your business from a headline rate of 20% to 10%. Those with a memory will recall that the relief was, until recently, known as Entrepreneurs’ Relief.
The broad rule of qualification is you must have owned the business (or business asset) either as a shareholder, sole trader or been in a business partnership for the last 2 years.
If you are selling shares you may also qualify if you have been an employee or officer holder (director) of a qualifying trading company for 2 years up to the date you sell your shares. In addition, you must also have had at least 5% of both the nominal share capital and voting rights and also be entitled to at least 5% of either all distributions or 5% of the profits that are available for distribution in relation to the assets on winding up.
If you are closing your business the same conditions apply and you must also dispose of any assets (or complete the winding-up of a business) within 3 years of the trade ceasing. Please note there is no cap on the number of times you can claim the relief, but you can only claim up to £1million of BADR in your lifetime. Any earlier disposals where Entrepreneurs’ Relief was claimed need to be taken into account in relation to this lifetime limit.
Finally, please note if you have never previously claimed BADR only the first £1 million will qualify for the 10% with the rest of the disposal taxable in the current tax year at 20/21 at 20%.
And finally, it is also worth remembering that if you have shares that are, for want of a better phrase “worthless”, you will be able to make a negligible value claim on any shares and utilise the loss against any gains made in the tax year. The end of the tax year is an opportune time to consider these ‘negligible value’ claims.
