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Reliefs from Capital Gains Tax

Reliefs from Capital Gains Tax

Contents

There are reliefs available to reduce or postpone your liability to Capital Gains Tax (CGT).

Private Residence Relief

Private Residence Relief may apply if you sell your home. You won't then have any CGT to pay.

Entrepreneurs' Relief

Entrepreneur's Relief is available to individuals who are:

  • sole traders;
  • partners;
  • shareholders in a personal trading company; and
  • some trustees.

It's not available to companies.

Entrepreneurs' Relief reduces the CGT you'd normally have to pay on disposing of:

  • all or part of your business (including its qualifying business assets, such as goodwill and business premises);
  • assets of your business that has stopped trading;
  • assets you owned and used in a business that you're leaving, e.g. premises you owned and used in a partnership or personal trading company you're leaving. The sale of these assets must be associated with your leaving the business; and
  • shares in your personal trading company. This is a trading company in which:
    • you're an officer (e.g. a director) or employee;
    • you own at least 5% of the ordinary share capital; and
    • you have at least 5% of the voting rights.

This relief allows individuals who sell their business or shares in their company to pay CGT at the rate of 10% (for disposals made on or after 23 June 2010) rather than at the higher rates of 18% and 28%.

Generally, you must have owned the asset you're selling for at least one year before the sale.

Entrepreneurs' relief will also be available to individuals who purchase shares in an unlisted company on or after 17 March 2016 and keep these shares for a period of 3 years from 6 April 2016. There is no requirement for them to be an officer or employee of the company. This is to encourage long-term investors to invest in companies.

There is a lifetime limit of £10 million for sales after 6 April 2011.

Different conditions apply depending on whether you're selling all or part of your business, business assets, a business that has ceased trading, or shares in a personal trading company. See the Gov.uk page for further details on the qualifying conditions.

Business Asset Rollover Relief

If you sell a qualifying business asset and use the proceeds to buy a new qualifying business asset, you may be able to claim 'Business Asset Rollover Relief'.

In order to claim this relief, you must:

  • be trading;
  • have used the old asset in the business;
  • use the new asset in the business; and
  • buy the new asset in the time limit – this runs from one year before the date of sale of the old asset to 3 years after its sale. HMRC may extend this time in some circumstances.

The old and new assets must both be qualifying assets. These include interests in buildings or land, fixed plant and machinery, and goodwill, but not company shares.

Business Asset Rollover Relief just postpones the CGT you'd normally pay on the old asset until you sell the new asset. Any gain belonging to the old asset is transferred ('rolled over') into the new asset. When you sell the new asset, your CGT liability will be calculated on this rolled-over gain plus any gain in value of the new asset since you bought it.

You must claim Business Asset Rollover Relief within 4 years of the end of the tax year in which the later of these 2 events occurred:

  • you sold the old asset; or
  • you acquired the new asset.

When you're filing your Self Assessment tax return for the tax year in which you sell the old asset, if you haven't yet bought the new asset, you can declare your intention to do so. You'll then get provisional relief. However, you must still buy the new asset within 3 years of selling the old one.

Example

In January 2014, you sell a factory for £250,000 that you'd bought for £175,000. Your gain would be £75,000. In February 2014, you buy a new factory for £360,000.

Both the old and the new factory are qualifying assets, and you've bought the new factory within 3 years of selling the old one. You could either pay CGT on the gain of £75,000 when selling the old factory, or use Business Asset Rollover Relief.

If you use Business Asset Rollover Relief, you'd pay no CGT at the time of the sale of the old factory, but the gain of £75,000 would be rolled over to the new factory. You'd be treated as if you'd bought the new factory for an adjusted purchase price of £285,000 (£360,000 - £75,000). Should you sell that factory in the future (and not claim a further relief), you'd pay CGT on the sale price of the new factory less its adjusted purchase price of £285,000.

For example, if you sold the new factory for £400,000, you'd pay CGT on the sum of £400,000 - £285,000 = £115,000.

Incorporation Relief

Normally if you sell your business, you'd pay CGT on the gain in the value of the business during the time you owned it.

However, if you incorporate your sole trade or partnership into a company (i.e. sell your business to a company in which you own shares), you could postpone paying CGT by claiming incorporation relief. You'd need to transfer all the assets of the business (other than cash) to your company in return solely for shares in that company. The business must be transferred as a going concern.

If you claim Incorporation Relief, you won't pay CGT at the time of incorporation. Instead, the gain from the business is rolled into the shares of the company. The value of the shares on incorporation is adjusted by deducting the gain in the value of the business. When you sell the shares, you'd pay CGT on the difference between the sale price and the adjusted acquisition value. This way you'll then pay CGT on the gain rolled into the shares plus any gain in the value of the shares since incorporation.

Example

If you sell a business worth £100,000 that you bought for £70,000, your gain would be £30,000. You can either:

  • choose to pay the CGT now on this gain (and claim Entrepreneurs' Relief); or
  • claim Incorporation Relief and postpone paying CGT until you sell your company shares.

If the shares in your company are worth £100,000 at the time you acquire them and you claim Incorporation Relief, you'll be treated as acquiring them at £70,000 (£100,000 less the gain of £30,000). Should you sell the shares in the future for £150,000, your gain on which you'll pay CGT would be £80,000 (£150,000 less the adjusted purchase price of £70,000).

This tax relief will be automatically applied by HMRC unless you ask it not to. If you don't wish to use the relief, the date by which you must tell HMRC will vary. It'll depend on whether you've sold all the shares of the newly incorporated business before the end of the tax year following that in which you incorporated the business. If so, you need to tell HMRC by the first anniversary of the 31 January following the tax year of incorporation. In all other cases, you have until the second anniversary of the 31 January following the tax year of incorporation to tell HMRC.

Gifts Holdover Relief

Gifts Holdover Relief applies to:

  • gifts of certain business assets; or
  • the sale of these assets with a gift element (a sale at less than market value).

It postpones the CGT on the gift until the recipient sells the asset.

It applies both to assets used in your trade and shares in trading companies not listed on a stock exchange. Both the giver and recipient must agree to claim this relief.

Normally the giver of the asset would pay CGT. This would be calculated on the gain in value of the asset while it was owned by the giver. Instead of paying this CGT, the giver and recipient could claim Gift Holdover Relief. The gain will then be transferred to the recipient. The recipient will be treated as acquiring the asset at a value lowered by the amount of the gain. When the recipient sells the asset, they'll pay CGT on the difference between the sale price and this adjusted acquisition value.

Example

You give your business premises to your son when they're worth £890,000. You bought the premises for £550,000. You could pay CGT on your gain of £340,000 (£890,000 - £550,000) (you may be able to claim Entrepreneurs' Relief if all the conditions for that relief are satisfied). Alternatively, you and your son could jointly claim Gifts Holdover Relief.

If you claim Gifts Holdover Relief, you won't pay any CGT at the date of the gift. Instead, your son will be treated as acquiring the business at the value of £550,000 (£890,000 - £340,000). If he later sells it for £1,000,000, he'll pay CGT on a gain of £450,000 (the sale price of £1,000,000 less the adjusted acquisition value of £550,000).

To claim this relief, you can request a form for 'Claim for holdover relief' from HMRC and submit it as part of your Self-Assessment tax return. If you don't normally file a Self-Assessment tax return, you can submit the claim form on its own. You must claim the relief within 4 years after the end of the tax year in which the gift was made.