Introduction
Capital Gains Tax (CGT) in the United Kingdom is imposed on the profit realized when an individual or entity disposes of an asset that has increased in value. Only the gain, not the total amount received, is subject to taxation. The CGT system includes several reliefs and exemptions that reduce or defer the tax liability under specific conditions. Among the most significant are Business Asset Disposal Relief (BADR), Hold-Over Relief, Rollover Relief, and the Annual Exemption. An accurate comprehension of these reliefs is necessary, particularly in the context of the SQE1 Functioning Legal Knowledge assessment.
Business Asset Disposal Relief (BADR)
Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs' Relief, is found in Sections 169H to 169S of the Taxation of Chargeable Gains Act 1992 (TCGA 1992). It allows individuals to pay a reduced rate of Capital Gains Tax on qualifying business disposals.
Key Features
- Reduced Tax Rate: Gains qualifying for BADR are taxed at 10%, compared to the standard rates of 10% or 20% for individuals, depending on their income tax bracket.
- Lifetime Limit: There is a lifetime limit of £1 million on the gains that can benefit from BADR.
- Qualifying Disposals: The relief applies to the disposal of all or part of a business, shares in a personal company, or assets of a business after it has ceased trading.
- Ownership Requirements: The individual must have owned the business, shares, or assets for at least two years prior to the disposal.
- Role in the Business: For share disposals, the individual must be an employee or office holder of the company and own at least 5% of the ordinary share capital and voting rights.
Legislative Basis
The detailed provisions governing BADR are laid out in the TCGA 1992, Sections 169H to 169S. These sections specify the conditions that must be met for an individual to qualify for the relief.
Practical Example
Consider Emma, who has owned and operated a small retail business as a sole trader for several years. She decides to sell the business and retire. The sale results in a capital gain of £800,000. Because Emma meets the qualifying conditions, she can claim BADR on the gain. As a result, she will pay CGT at 10% on the £800,000 gain, resulting in a tax liability of £80,000, instead of paying the higher rate.
Hold-Over Relief
Hold-Over Relief allows for the deferral of CGT when certain types of assets are transferred without payment or for less than their market value. This relief is particularly relevant for gifts of business assets.
Key Features
- Applicable to Gifts: The relief applies when business assets are gifted or sold at undervalue.
- Deferral of Gain: The gain that would have been chargeable to CGT is deferred until the recipient disposes of the asset.
- Qualifying Assets: Assets eligible for Hold-Over Relief include business assets, shares in unlisted companies, and agricultural property.
- Consent Required: Both the donor and the recipient must jointly claim the relief.
Legislative Basis
Sections 165 and 260 of the TCGA 1992 provide the legal basis for Hold-Over Relief, outlining the conditions under which it applies.
Practical Example
Suppose John owns shares in a family-owned trading company. He decides to gift these shares to his daughter, Alice. The shares have significantly increased in value since John acquired them. By claiming Hold-Over Relief, John can defer the CGT that would otherwise arise on the gift. The deferred gain is effectively transferred to Alice, and she will consider this gain when she eventually disposes of the shares.
Rollover Relief
Rollover Relief allows businesses to defer CGT when the proceeds from the disposal of certain assets are reinvested in new qualifying assets.
Key Features
- Deferral of Gain: The capital gain from the disposal is deferred by deducting it from the cost of the new asset.
- Qualifying Assets: Assets must be used in the trade, such as land and buildings, fixed plant and machinery, and goodwill (for individuals and partnerships).
- Time Frame for Reinvestment: The new asset must be acquired within one year before or three years after the disposal of the old asset.
- Partial Reinvestment: If only part of the proceeds is reinvested, partial relief is available.
Legislative Basis
Sections 152 to 158 of the TCGA 1992 set out the provisions for Rollover Relief, detailing the eligibility criteria and the method of calculating the deferred gain.
Practical Example
ABC Ltd sells an old factory for £500,000, realizing a gain of £200,000. The company then purchases a new factory for £600,000 within the required time frame. By claiming Rollover Relief, the £200,000 gain is deducted from the cost of the new factory. The base cost of the new factory for CGT purposes is therefore £400,000 (£600,000 - £200,000). The gain is deferred until the new factory is disposed of in the future.
Annual Exemption
Each individual is entitled to an Annual Exempt Amount, which allows for a certain amount of capital gains to be realized tax-free.
Key Features
- Exempt Amount: For the tax year 2023/24, the Annual Exempt Amount is £6,000.
- Individuals Only: This exemption applies to individuals, not companies.
- No Carry Forward: Unused exemptions cannot be carried forward to future tax years.
Practical Example
Laura disposes of some shares, realizing a capital gain of £5,500 during the 2023/24 tax year. Since the gain is below the Annual Exempt Amount, she has no CGT liability for that year. If her gain had been £7,000, she would have paid CGT on £1,000 (£7,000 - £6,000).
Interaction of Reliefs and Exemptions
Understanding how these reliefs and exemptions interact is important for effective tax planning and compliance.
- Order of Application: The Annual Exempt Amount is applied before any reliefs.
- Multiple Reliefs: In some cases, more than one relief may be available, but restrictions may apply.
Technical Example
Consider Michael, who disposes of qualifying business assets resulting in a gain of £1,050,000. He is eligible for BADR and also has not used his Annual Exempt Amount.
- Apply the Annual Exempt Amount: £1,050,000 - £6,000 = £1,044,000 taxable gain.
- Apply BADR: The first £1,000,000 is taxed at 10% under BADR.
- Remaining Gain: The excess £44,000 is taxed at the standard CGT rate applicable to Michael.
Conclusion
Within the Capital Gains Tax framework, the interaction of reliefs and exemptions plays a critical role in determining tax liabilities. The precise application and interplay of the Annual Exempt Amount, Business Asset Disposal Relief, Hold-Over Relief, and Rollover Relief can significantly affect the calculation of taxable gains. For example, understanding the order in which the Annual Exempt Amount is applied before other reliefs is essential.
Business Asset Disposal Relief, governed by Sections 169H to 169S of the TCGA 1992, provides a reduced tax rate for qualifying business disposals, subject to strict ownership and participation requirements. Hold-Over Relief, under Sections 165 and 260, allows the deferral of gains when gifting certain business assets, transferring the tax liability to the recipient. Rollover Relief, detailed in Sections 152 to 158, enables the deferral of gains when proceeds from the disposal of business assets are reinvested in new qualifying assets within a specified time frame.
The specific requirements laid out in the legislation must be meticulously followed to qualify for these reliefs. A detailed understanding of ownership periods, qualifying assets, and necessary claims ensures accurate application of the law. These principles are important elements of the UK tax system and require careful consideration to ensure compliance and optimal tax outcomes.
